If grandma contributed money to a 529 plan and then, after separation/divorce of the parents, withdrew the money prior to the child's 18th birthday, could the child contest the withdrawal in court?
You'd generally have a tough time getting the money. In most cases, the owner of the 529 account can change the beneficiary to another relative without any trouble. In fact, that's one of the big attractions for grandparents, who can switch the 529 to another grandchild if one gets a full scholarship or doesn't end up going to college -- or for any reason.
You can make the change without any income-tax consequences as long as the new beneficiary is a member of the original beneficiary's family -- including a child, brother, sister, stepbrother or stepsister, father or mother, stepfather or stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law, or the spouse of any of those people, or a first cousin (enabling grandma to switch the money to another grandchild who isn't a brother or sister). For the full list, see IRS Publication 970, Tax Benefits for Higher Education.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
And if grandma doesn't mind paying taxes and penalties, she can even take the money back for herself. "Unless it is a custodial 529, the beneficiary has no rights to the money in a 529," says Joe Hurley of Savingforcollege.com.
That one exception he mentions is if the money had originally been in a custodial account for the child and then was rolled over into a 529. In that case, it is legally the child's money, and you can take grandma to court to try to get it.
For more information about 529 plans, including a list of our favorites, see Find the Best 529 Plan.
-
Focus on These Five Critical Areas in Retirement PlanningWorried about how you'll pay for your retirement? It can help to structure your finances around five key areas: taxes, income, medical, legacy and investments.
-
Is Downsizing Right for Your Retirement?The lower costs of a smaller home in retirement might sound appealing, but be ready for the trade-offs that come with making this big decision.
-
529 Plans: A Powerful Way to Tackle Rising Education CostsContributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
-
Tax Tips for Transferring Excess 529 Plan Funds to Roth IRAs: The Tax LetterThe Tax Letter 529 plans can help blunt the cost of paying for college. But if you want to use leftover funds there are some tax tips to bear in mind.
-
529s: No Longer the Ho-Hum Investing Device for CollegeChanges to the plans allow for the savings to be rolled into a Roth IRA, as long as certain rules are met, if a child decides not to pursue their education.
-
529 Plans: Give the Gift of Education (and Compounding)As the cost of college tuition skyrockets, parents and grandparents can take advantage of tax-efficient 529 plans and higher limits on gift and estate taxes.
-
Have Leftover 529 Funds? Expert Strategies for Unused BalancesExcess 529 funds represent both a challenge and an opportunity, and knowing your options is essential.
-
Using a 529 Plan? Here’s What to Keep in MindAs the school year progresses, ensure you’re using the money for qualified expenses and keeping track of documentation. Taxes and options for unused funds are also considerations.
-
Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)Tax benefits and a Roth IRA feature make 529 college savings plans attractive, but they're not a one-size-fits-all option.
-
529 Plans Get a Boost With Tax-Free Rollovers to Roth IRAsThanks to the SECURE 2.0 Act, you're now able to roll over funds from your 529 into a Roth IRA, as long as certain conditions are met.
