By Sandra W. Reed


Will and Karen’s son, Josh, has two children, ages 4 and 10. They are concerned that Josh’s business may not survive after having to close due to the coronavirus pandemic and that, therefore, he won’t be able to put aside funds for their grandchildren’s college education. They are considering establishing a 529 plan account to benefit the grandchildren.


What is a 529 account?


A 529 account is an account to be used for the beneficiary’s education expenses, including college, trade school, private or parochial schools, grades K-12. The amounts deposited into the account are tax-free, as are the earnings on the account over time. If the funds distributed are used exclusively for education expenses, neither will they be taxed when distributed.


Who can open a 529 account?


Any U.S. resident, over the age of 18 with a Social Security number or tax I.D. can open a 529 account. Individuals can even open an account for themselves. Will and Karen are Texas residents with Social Security numbers. They are eligible to open a 529 account.


Who can be a beneficiary of a 529 account?


Anyone who has a Social Security number or tax I.D. number can be a beneficiary of a 529 account. There is no age limit on the beneficiary. That means that Will and Karen can make their grandchildren the beneficiaries of the 529 account they establish.


Beneficiaries can be changed if plans change. For instance, if Josh has another child, the child can be added as a beneficiary. If the funds are to be used for college, and one child decides not to go, the remaining funds can be distributed on behalf of remaining beneficiaries.


Can withdrawals be made for purposes other than education?


Withdrawals can be made at any time for any purpose. However, if funds are distributed for anything other than education expenses, federal income taxes will become due and a 10% tax penalty may be assessed. Should the beneficiary receive a scholarship that makes the funds unnecessary or the beneficiary attends a U.S. military academy, an exception to the 10% penalty rule applies.


Sandra W. Reed practices Elder Law in Somervell County, handling probating of estates, drafting of wills, trusts, powers of attorney and deeds as well as estate and Medicaid planning. She lives in beautiful Chalk Mountain. She can be reached at 254.797.0211; 817.946.2809 or by at sreed@kattenbenson.com.