FROM WSJ.COM-
If you have a college-tuition bill coming due this year and plan to pay it all with money from a 529 savings account, you might be missing out on some valuable tax benefits.
Americans are pouring billions of dollars into 529 college-savings plans—more than $221 billion was invested in these plans as of mid-2014, up from $52 billion a decade earlier, according to the Investment Company Institute, a mutual-fund trade group.
The plans are popular because earnings grow and are distributed tax-free if the money is spent on qualified education expenses. (A recent proposal from President Barack Obama to curtail the tax benefits of new contributions to 529 plans was withdrawn quickly.)
But there are other tax breaks available for college expenses, for those who qualify based on their income. You can’t claim them, though, for expenses you cover with money from a 529 plan.
So if you are eligible for these other credits, “a big tax-planning mistake would be to take the total education expenses and withdraw that from the 529 plan,” says Tom Fredrickson, founder of Fredrickson Financial Planning in New York.
Figuring out whether you qualify for various tax breaks will help you determine which expenses to pay with money from your 529 account and which expenses to pay out of regular savings, cash flow or loans.
Big Opportunity
Three of the most valuable tax benefits for education are the American Opportunity tax credit, Lifetime Learning credit, and tuition-and-fees deduction. The tuition-and-fees deduction has expired for 2015, but it’s a provision that Congress tends to resuscitate at year-end. (It had also expired for 2014 but was extended in December.)
These three are mutually exclusive, meaning you can’t use more than one per student. For most eligible taxpayers, the American Opportunity credit is the most valuable, says Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a consumer-information website based in Las Vegas.
The American Opportunity credit can reduce your tax bill by as much as $2,500, more than most taxpayers can save with either of the other two options. Also, while the American Opportunity credit is unavailable to wealthier taxpayers, the income limits are higher than those for the Lifetime Learning credit and tuition-and-fees deduction. If your income is below the level where the American Opportunity tax credit starts to phase out, “it’s a no-brainer,” Mr. Kantrowitz says. Except in rare cases, he says, “the AOTC is going to yield more financial benefits.”
If you’re eligible for the American Opportunity tax credit, you can maximize your tax benefits by planning to spend $4,000 from your cash, regular savings or loan proceeds on qualified education expenses. Then, any remaining expenses can be paid with money from your 529 plan.
Why $4,000? You can claim an American Opportunity tax credit for 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000.
“You don’t want to leave the tax credit on the table by paying for everything out of the 529 plan,” says Maura Griffin, founder of Blue Spark Capital Advisors in New York.
Don’t forget to consider financial aid and other education benefits, such as scholarships and grants. Any of those that are tax-free will reduce your qualified expenses. After taking those benefits into account, focus on finding expenses that qualify for the American Opportunity credit, Mr. Kantrowitz says, adding that “529 plans have the broadest definition of qualified expenses, so you’d first focus on the AOTC.” For example, room and board isn’t a qualified expense under the American Opportunity credit but generally is for 529-plan distributions.
Income Limits
Of course, you won’t qualify for the American Opportunity credit, the Lifetime Learning credit, or a tuition-and-fees deduction if your income is too high. The American Opportunity credit, with the highest threshold, is unavailable for those with modified adjusted gross income above $90,000, or $180,000 for joint filers. (Modified adjusted gross income is adjusted gross income plus foreign income and some other income added back.)
American Opportunity tax credits are reduced for those with modified adjusted gross income between $80,000 and $90,000, or between $160,000 and $180,000 for joint filers. If your income is in those ranges, the benefit essentially is halved, Mr. Kantrowitz says. Instead of a credit for 100% of the first $2,000 of qualified expenses and 25% of the second $2,000, “it’s effectively 50% of the first $2,000, 12.5% of the second $2,000,” he says.
That might mean that taking money out of your 529 plan will give you a bigger tax benefit, depending on your tax bracket and other factors. “If you’re in the income phase-outs I suggest you do the calculations to see what the benefit is each way,” he says.
If you do that, remember that for federal taxes you only benefit from a tax break on the earnings in your 529 plan, not the contributions, since the contributions were made with after-tax money.
Say, for example, one-third of your 529 withdrawal is earnings. If you are in the 25% tax bracket, the tax benefit of that 529 money is 25% of one-third of the amount you withdraw, or a little more than 8 cents per dollar of education expenses. Check your state’s rules for possible additional tax benefits.
Showing posts with label College Savings Plan. Show all posts
Showing posts with label College Savings Plan. Show all posts
Wednesday, February 11, 2015
Sunday, September 14, 2014
Tax Planning For College
Paying college expenses. You may be able to take a credit for some of your child's tuition expenses. There are also tax-advantaged ways of getting your child's college expenses paid by others.
Tuition tax credits. You can take an American Opportunity tax credit of up to $2,500 per student for the first four years of college - a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school-a 20% credit for up to $10,000 in tuition and fees.
The American Opportunity tax credit is 40% refundable. That means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who qualifies for the maximum credit of $2,500, but who has no tax liability would still qualify for a $1,000 (40% of $2,500) refund from the government.
Both credits are phased out for higher-income taxpayers. The American Opportunity tax credit is phased out for couples with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000. The Lifetime Learning credit is phased out (for 2014) for couples with income between $108,000 and $128,000, and for singles with income between $54,000 and $64,000.
Only one credit can be claimed for the same student in any given year. However, a taxpayer is allowed to claim an American Opportunity tax credit or a Lifetime Learning credit for a tax year and to exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account for the same student, as long as the distribution isn't used for the same educational expenses for which a credit was claimed.
Scholarships. Scholarships are exempt from tax if certain conditions are satisfied. The most important are that the scholarship must not be compensation for services, and it must be used for tuition, fees, books, supplies, and similar items (and not for room and board).
Although a scholarship is tax-free, it will reduce the amount of expenses that may be taken into account in computing the tax credits discussed above, and may therefore reduce or eliminate those credits.
In an exception to the rule that a scholarship must not be compensation for services, a scholarship received under a health professions scholarship program may be tax-free even if the recipient is required to provide medical services as a condition for the award.
Employer educational assistance programs. If your employer pays your child's college expenses, the payment is a fringe benefit to you and is taxable to you as compensation, unless the payment is part of a scholarship program that's "outside of the pattern of employment." Then the payment will be treated as a scholarship (if the other requirements for scholarships are satisfied).
Tuition reduction plans for employees of educational institutions. Tax-exempt educational institutions sometimes provide tuition reductions for their employees' children who attend that educational institution, or cash tuition payments for children who attend other educational institutions. If certain requirements are satisfied, these tuition reductions are exempt from income tax.
College expense payments by grandparents and others. If someone other than you pays your child's college expenses, the person making the payments is generally subject to the gift tax to the extent the payments and other gifts to the child by that person exceed the regular annual (per donee) gift tax exclusion of $14,000 for 2014. Married donors who consent to split gifts may exclude gifts of up to $28,000 for 2014.
However, if the other person pays your child's school tuition directly to an educational institution, there's an unlimited exclusion from the gift tax for the payment. The relationship between the person paying the tuition and the person on whose behalf the payments are made is irrelevant, but the payer would typically be a grandparent. The unlimited gift tax exclusion applies only to direct tuition costs and not other college expenses.
Student loans. You can deduct interest on loans used to pay for your child's education at a post-secondary school, including some vocational and graduate schools. The deduction is an above-the-line deduction (meaning that it's available even to taxpayers who don't itemize). The maximum deduction is $2,500. However, the deduction phases out for taxpayers who are married filing jointly with AGI between $130,000 and $160,000 (between $65,000 and $80,000 for single filers).
Some student loans contain a provision that all or part of the loan will be cancelled if the student works for a certain period of time in certain professions for any of a broad class of employers, e.g., as a doctor for a public hospital in a rural area. The student won't have to report any income if the loan is canceled and he performs the required services.
Bank loans. The interest on loans used to pay educational expenses is personal interest which is generally not deductible (exception being student loans). However, if the loan is "home equity indebtedness," and interest on the loan is "qualified residence interest," the interest is deductible if you itemize. If interest is deductible as qualified residence interest, it can't be deducted as education loan interest.
Borrowing against retirement plan accounts. Many company retirement plans permit participants to borrow cash. This option may be an attractive alternative to a bank loan, especially if your other debt burden is high. However, typically there's no deduction for the personal interest paid on such a loan.
Withdrawals from retirement plan accounts. IRAs and qualified retirement plans represent the largest cash resource of many taxpayers. You can pull money out of your IRA (including a Roth IRA) at any time to pay college costs without incurring the 10% early withdrawal penalty that usually applies to withdrawals from an IRA before age 591/2 . However, the distributions are subject to tax under the usual rules for IRA distributions.
Not all of the above breaks may be used in the same year, and use of some of them reduces the amounts that qualify for other breaks. So it takes planning to determine which should be used in any given situation.
Monday, July 21, 2014
Tax planning moves to consider for your new child
Now obviously, everybody’s situation is different, but below are 3 tax-planning moves you should plan to make as soon as possible once you become a father. Perhaps one or more of them is relevant for you and your planning.
- Fund a 529 Plan – 529 plans are great way to save money for a child’s education. These accounts, like IRAs, allow you to accumulate funds on a tax-favored basis. Although there is no federal income tax deduction for contributions to a 529 plan, funds grow tax-deferred while in a 529 account and, if distributions are used to pay qualified higher education costs, those distributions are tax-free. Plus, although there is no federal income tax deduction available, many states offer a state income tax break for contributions made by its residents to its own plan. Just like IRAs, the earlier one starts saving in a 529 plan, the better off they will be. With higher education costs continuing to sky rocket, I’m going to start as early as I can!
- Attempt to Establish a Roth IRA as Soon as Possible – There are no minimum age requirements to open a Roth IRA. In theory, even a newborn can have one. The key, however, is that a person, regardless of age, needs some sort of “compensation” to make a Roth IRA contribution. Usually, that compensation is some sort of earned income. Now you might ask, “How can a newborn have earned income?” Well, there are a number of ways. Perhaps you own a business and you use your child’s likeness on marketing material. You could pay them for that, legitimately of course. Then, an amount equal to that earned income could be contributed to their Roth IRA (provided they meet the other requirements). I personally have no idea when my child will generate earned income. Maybe it will be soon. Maybe not for 20 or more years. That said, whenever the time comes, I am going to do everything in my power to start his tax-free retirement savings off as early as possible, even if it means I have to make a contribution to his Roth IRA with my own money.
- Update my Beneficiary Forms – Updating one’s beneficiary forms doesn’t sound like a tax-planning move, but instead, simply an estate planning move. In reality, it is both. Designated beneficiaries – generally living, breathing people named on the beneficiary form – are able to stretch distributions over their life expectancy. This helps an account grow tax-deferred as long as possible and minimize the tax impact on any distributions.
Sunday, July 20, 2014
Tapping a 529 Plan: 5 Tips to Get the Most Out of College Savings
Apart from retirement, saving for college expenses is one of the longest-term goals that families set for their finances. After scrimping for years to build up your college savings, the last thing you want to do is make mistakes that will cost you when it comes time to make withdrawals.
If you've used 529 plans to save for college, making the most of the available tax advantages is just part of the picture. Here are five tips for making the most of your 529 plan cash.
1. Spend Your 529 Plan Money on the Right Expenses
You're allowed to get tax-free treatment on withdrawals for qualified higher education expenses. Those expenses include tuition, fees, books, supplies and equipment.
If the student attends college at least half-time or more, room and board also qualifies -- but the amount is limited to a figure set by the school. So if the student lives off-campus, ask the school for its maximum.
2. Don't Waste Your Opportunities for Other Tax Credits
Even if you have enough 529 plan money to cover every penny of your college expenses, you still might not want to withdraw the full amount you owe. That's because multiple tax breaks are available for college expenses, but you can only use each dollar of expenses for one benefit.
Specifically, many students and parents are eligible for the American Opportunity credit, which gives a tax credit of 100 percent of the first $2,000 and 25 percent of the next $2,000 of educational expenses. You can use 529 plan money to claim that credit, but if you do, then it won't be eligible for the usual tax-free treatment on 529 plan distributions. Yet you definitely don't want to miss out on what could be as much as $2,500 in free tax credits, so being smart with your planning involves using expenses where they'll help you and your kids the most.
3. Know the Implications of Who Gets the Check
Most 529 plans give you a choice to have withdrawals paid to you, your student or the college. Having money go directly to the school might seem to make the most sense, but some experts worry that can affect a student's financial aid from the school.
Having money paid to a parent or the student can raise tax-audit flags. Parents and students should keep meticulous records matching up money withdrawn from 529 plans to the qualifying expenses to convince the Internal Revenue Service that they in fact used withdrawals for eligible expenses.
4. Get the Timing Right
Schools don't typically use the calendar-year system that the IRS uses. So while withdrawing a full school year's worth of expenses might seem like the simplest, it won't pass muster with the IRS.
Rather, the IRS wants to see you take money out in the same calendar year in which it's due. So if your spring-semester bill isn't due until January, wait until January to take that money out of your 529 plan account.
5. Be Smart About Scholarships
One frequent concern among 529 plan savers is that their child will get a scholarship and not need the 529 plan money. If that happens, you can withdraw the scholarship amount from the 529 plan account. It won't be treated as a tax-free distribution, but you won't owe a 10 percent penalty on that amount.
Whether you want to take a scholarship-exception withdrawal depends on how much money you have in the 529 plan, what future expenses might be, and whether you have other children who need college money. But if this is the last chance to get money out of a 529 plan without paying a penalty, it's usually worth it to avoid paying more later on.
If you've used 529 plans to save for college, making the most of the available tax advantages is just part of the picture. Here are five tips for making the most of your 529 plan cash.
1. Spend Your 529 Plan Money on the Right Expenses
You're allowed to get tax-free treatment on withdrawals for qualified higher education expenses. Those expenses include tuition, fees, books, supplies and equipment.
If the student attends college at least half-time or more, room and board also qualifies -- but the amount is limited to a figure set by the school. So if the student lives off-campus, ask the school for its maximum.
2. Don't Waste Your Opportunities for Other Tax Credits
Even if you have enough 529 plan money to cover every penny of your college expenses, you still might not want to withdraw the full amount you owe. That's because multiple tax breaks are available for college expenses, but you can only use each dollar of expenses for one benefit.
Specifically, many students and parents are eligible for the American Opportunity credit, which gives a tax credit of 100 percent of the first $2,000 and 25 percent of the next $2,000 of educational expenses. You can use 529 plan money to claim that credit, but if you do, then it won't be eligible for the usual tax-free treatment on 529 plan distributions. Yet you definitely don't want to miss out on what could be as much as $2,500 in free tax credits, so being smart with your planning involves using expenses where they'll help you and your kids the most.
3. Know the Implications of Who Gets the Check
Most 529 plans give you a choice to have withdrawals paid to you, your student or the college. Having money go directly to the school might seem to make the most sense, but some experts worry that can affect a student's financial aid from the school.
Having money paid to a parent or the student can raise tax-audit flags. Parents and students should keep meticulous records matching up money withdrawn from 529 plans to the qualifying expenses to convince the Internal Revenue Service that they in fact used withdrawals for eligible expenses.
4. Get the Timing Right
Schools don't typically use the calendar-year system that the IRS uses. So while withdrawing a full school year's worth of expenses might seem like the simplest, it won't pass muster with the IRS.
Rather, the IRS wants to see you take money out in the same calendar year in which it's due. So if your spring-semester bill isn't due until January, wait until January to take that money out of your 529 plan account.
5. Be Smart About Scholarships
One frequent concern among 529 plan savers is that their child will get a scholarship and not need the 529 plan money. If that happens, you can withdraw the scholarship amount from the 529 plan account. It won't be treated as a tax-free distribution, but you won't owe a 10 percent penalty on that amount.
Whether you want to take a scholarship-exception withdrawal depends on how much money you have in the 529 plan, what future expenses might be, and whether you have other children who need college money. But if this is the last chance to get money out of a 529 plan without paying a penalty, it's usually worth it to avoid paying more later on.
Tuesday, January 21, 2014
Kids and Money: Tips, tricks to filing FAFSA
If you're turning your attention this month to filling out the Free Application for Federal Student Aid, you'll notice your information can be sent to up to 10 colleges at a time.
But what you may not realize is that the order in which you list the schools could influence the amount of financial aid you receive or in some cases, even admission.
That's one of the valuable takeaways from a new book by Mark Kantrowitz and David Levy, financial aid experts with Edvisors.com, which operates a group of websites devoted to planning and paying for college.
Their book, Filing the FAFSA: The Edvisors Guide to Completing the Free Application for Federal Student Aid, provides a detailed reference for parents and students seeking financial assistance to pay for college.
For most families, that process starts with the FAFSA, although some mostly private colleges and universities also require additional financial-aid paperwork.
If anybody fits the definition of financial aid experts, it's the authors. Kantrowitz, the senior vice president and publisher of Edvisors.com, has written several books on student loans and scholarships and has frequently testified before Congress. Levy directed college financial aid programs for 30 years before becoming Edvisors' associate editor.
Their new book offers especially useful tips on how to avoid FAFSA minefields and increase your financial aid eligibility.
Take the task of listing colleges to receive your financial information. Why is the order such a big deal?
Many schools — outside of the most highly selective — pay attention to how schools are ordered and use the information as a form of "competitive intelligence," the authors said. In some instances, a school at the top of the list might offer a smaller aid package because they think the student will attend regardless of the bottom-line cost, the author said.
To counter, Kantrowitz and Levy suggest students list their second-choice school first, and their top choice second or third. The first three positions matter the most. A caveat: The order in which schools are listed does not affect federal aid, but it can influence state aid and funding from the institution itself, the authors said.
In another scenario, if a second-choice school sees several more selective institutions listed on the FAFSA, the school might reject the applicant altogether in order to increase the percentage of students who accept its admissions offer. That measurement can help a school improve its ranking in the widely followed lists of top colleges.
"So this leads to strange circumstances where a student is admitted to an Ivy League institution and rejected by less selective institutions," the authors wrote.
Confused by all the gamesmanship? The point is to be aware that it goes on.
Some of the authors' other FAFSA suggestions:
■ Don't wait until your student has been accepted at a school or federal tax returns for this year have been filed to submit the FAFSA. Some schools have deadlines for state funds as early as Feb. 1. Other schools award aid on a first-come, first-served basis. Once you're organized, it takes about one hour to complete the online version of the FAFSA. There's also a paper version.
■ Don't assume your income is too high to qualify for aid. The FAFSA determines eligibility for unsubsidized federal Stafford and PLUS loans, which are available regardless of financial need. "Even wealthy students and parents can get these low-cost loans," the authors wrote.
■ Double-check your data. For example, transposing two digits in your student's Social Security number is one of the most common mistakes
But what you may not realize is that the order in which you list the schools could influence the amount of financial aid you receive or in some cases, even admission.
That's one of the valuable takeaways from a new book by Mark Kantrowitz and David Levy, financial aid experts with Edvisors.com, which operates a group of websites devoted to planning and paying for college.
Their book, Filing the FAFSA: The Edvisors Guide to Completing the Free Application for Federal Student Aid, provides a detailed reference for parents and students seeking financial assistance to pay for college.
For most families, that process starts with the FAFSA, although some mostly private colleges and universities also require additional financial-aid paperwork.
If anybody fits the definition of financial aid experts, it's the authors. Kantrowitz, the senior vice president and publisher of Edvisors.com, has written several books on student loans and scholarships and has frequently testified before Congress. Levy directed college financial aid programs for 30 years before becoming Edvisors' associate editor.
Their new book offers especially useful tips on how to avoid FAFSA minefields and increase your financial aid eligibility.
Take the task of listing colleges to receive your financial information. Why is the order such a big deal?
Many schools — outside of the most highly selective — pay attention to how schools are ordered and use the information as a form of "competitive intelligence," the authors said. In some instances, a school at the top of the list might offer a smaller aid package because they think the student will attend regardless of the bottom-line cost, the author said.
To counter, Kantrowitz and Levy suggest students list their second-choice school first, and their top choice second or third. The first three positions matter the most. A caveat: The order in which schools are listed does not affect federal aid, but it can influence state aid and funding from the institution itself, the authors said.
In another scenario, if a second-choice school sees several more selective institutions listed on the FAFSA, the school might reject the applicant altogether in order to increase the percentage of students who accept its admissions offer. That measurement can help a school improve its ranking in the widely followed lists of top colleges.
"So this leads to strange circumstances where a student is admitted to an Ivy League institution and rejected by less selective institutions," the authors wrote.
Confused by all the gamesmanship? The point is to be aware that it goes on.
Some of the authors' other FAFSA suggestions:
■ Don't wait until your student has been accepted at a school or federal tax returns for this year have been filed to submit the FAFSA. Some schools have deadlines for state funds as early as Feb. 1. Other schools award aid on a first-come, first-served basis. Once you're organized, it takes about one hour to complete the online version of the FAFSA. There's also a paper version.
■ Don't assume your income is too high to qualify for aid. The FAFSA determines eligibility for unsubsidized federal Stafford and PLUS loans, which are available regardless of financial need. "Even wealthy students and parents can get these low-cost loans," the authors wrote.
■ Double-check your data. For example, transposing two digits in your student's Social Security number is one of the most common mistakes
Monday, November 11, 2013
Empty Nesters: What Can You Do With a College Savings Plan if Your Kids Are out of School?
FROM FOOL.COM -
So your kids have completed college and you still have money left in your 529 college savings plan. You can siphon the remaining cash and spend it on anything you please, but it will cost you -- both a 10 percent penalty and income taxes apply.
There are, however, ways to skip the penalty and stretch the funds further -- you'll just have to apply it to further education.
It's never too late to go back to college
Consider going back to college. Just because your kids may not be using the money or have already finished college doesn't mean that the money has to go to waste. Many parents are going back to school in response to the economic troubles of the last decade. After all, only the original beneficiary's family members can take advantage of the funds without tax penalties.
No penalty with tax-free academic rewards
While in school, if your kids receive free scholarship or fellowship awards, you will not have to pay the penalty as stipulated by the 529 plan. This is an exception written into the IRS tax code. Unfortunately, you will pay income tax for any earnings from your distribution, just not the 10 percent penalty.
Some other exceptions include nontaxable distributions for education assistance from an employer or if the beneficiary receives veteran assistance or attends a U.S. military academy. If you can avoid the penalty fee based on these exceptions, you might consider rolling over this money into a retirement investment. Before you make a final decision, note that every state is different and the rules vary.
Change the designated beneficiary
If you feel that holding onto your account may be a better option, remember that your family can benefit from college savings even if your children are all finished with school. You may want to change the beneficiary to someone outside your immediate family. In most cases you can transfer the beneficiary to a first cousin, a brother or sister -- related by blood or marriage -- or an in-law. Make sure you check the bi-lines of your 529 plan and consult with a tax advisor to know for certain whom you may designate as the beneficiary.
Additionally, you can designate a future grandchild as a beneficiary. In this case, you would want to transfer the ownership of the account to your child so that your grandchild will be the beneficiary under their parent's account. You can do this penalty-free.
As with any other investment vehicle, always consult your CPA while you are planning your next move. Every decision you make will affect your taxes and planning each step is fundamental in getting the most out of your 529 plan.
So your kids have completed college and you still have money left in your 529 college savings plan. You can siphon the remaining cash and spend it on anything you please, but it will cost you -- both a 10 percent penalty and income taxes apply.
There are, however, ways to skip the penalty and stretch the funds further -- you'll just have to apply it to further education.
It's never too late to go back to college
Consider going back to college. Just because your kids may not be using the money or have already finished college doesn't mean that the money has to go to waste. Many parents are going back to school in response to the economic troubles of the last decade. After all, only the original beneficiary's family members can take advantage of the funds without tax penalties.
No penalty with tax-free academic rewards
While in school, if your kids receive free scholarship or fellowship awards, you will not have to pay the penalty as stipulated by the 529 plan. This is an exception written into the IRS tax code. Unfortunately, you will pay income tax for any earnings from your distribution, just not the 10 percent penalty.
Some other exceptions include nontaxable distributions for education assistance from an employer or if the beneficiary receives veteran assistance or attends a U.S. military academy. If you can avoid the penalty fee based on these exceptions, you might consider rolling over this money into a retirement investment. Before you make a final decision, note that every state is different and the rules vary.
Change the designated beneficiary
If you feel that holding onto your account may be a better option, remember that your family can benefit from college savings even if your children are all finished with school. You may want to change the beneficiary to someone outside your immediate family. In most cases you can transfer the beneficiary to a first cousin, a brother or sister -- related by blood or marriage -- or an in-law. Make sure you check the bi-lines of your 529 plan and consult with a tax advisor to know for certain whom you may designate as the beneficiary.
Additionally, you can designate a future grandchild as a beneficiary. In this case, you would want to transfer the ownership of the account to your child so that your grandchild will be the beneficiary under their parent's account. You can do this penalty-free.
As with any other investment vehicle, always consult your CPA while you are planning your next move. Every decision you make will affect your taxes and planning each step is fundamental in getting the most out of your 529 plan.
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