Only open a 529 account for multiple children if they're at least four years apart, one expert advises.

4 Things to Consider When Changing 529 Plan Beneficiaries

Owners of college savings accounts can designate different beneficiaries among family members.

Only open a 529 account for multiple children if they're at least four years apart, one expert advises.

Only open a 529 account for multiple children if they're at least four years apart, one expert advises.

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Benjamin Tobias, a Florida-based personal financial adviser, had a client who was ready to return to college and build her own career after raising her children. Fortunately, there was still $60,000 left in her son's 529 plan account, a tax-advantaged investment account for college savings

As the account owner, she could reassign the money to whomever she wanted. Now, she's utilizing the balance of her son's college fund to pay for her own education. 

[Take these steps before opening a 529 plan.] 

Families considering changing beneficiaries, the designated people who can utilize funds within 529 plan accounts for their education, need to be aware of the following four facts. 

1. The account owner retains control. While the funds can only be used for the named beneficiary's education, the beneficiary has no control of the account, Tobias says. 

If a grandparent opens an account for a grandchild, for instance, he or she can change the person allowed to utilize the funds as many times as the 529 plan allows, with changes typically permitted once per year. 

2. Changing beneficiaries among siblings requires careful planning. Saving for multiple children in one account generally isn't a good idea unless their ages are at least four years apart, says Stacy Francis, a New York-based certified financial planner. 

If there is a significant age difference between children, changing beneficiaries is as simple as designating the younger sibling as the new beneficiary after the older one finishes college, she notes. 

Parents who haven't started 529 plan accounts for their children should open separate accounts for kids who are closer in age, Francis recommends; otherwise, it can be tough to determine which years to fund each child. 

[Avoid these costly mistakes when saving for college.] 

3. Only family members can withdraw 529 plan funds without penalty. While anyone can open a 529 plan account, only family members of the original beneficiary can use the funds for educational expenses without incurring a tax penalty, says Mackey McNeill, a Kentucky-based certified public accountant. 

However, families who want to change the beneficiary can choose among multiple generations, she notes. For instance, if a couple's oldest offspring receives a scholarship, they could reassign funds to nearly anyone else related to the child, such as siblings, parents, grandparents, first cousins, aunts, and uncles, McNeill says. 

4. CPA advice may be necessary. Sometimes changing beneficiaries becomes complicated, such as when future parents are planning an adoption. In such cases, you should consult with a tax adviser, Francis suggests. 

"We had a client who was adopting a child from overseas, and it took quite some time to get the social security number," Francis says. "The new mom opened an account and named another family member the beneficiary. She then updated the beneficiary to her child." 

[See how parents are billed for 529 plans.] 

If the family member chosen as the original beneficiary was of an older generation, such as the client's mom (who would also be the child's grandparent), putting money into a 529 plan could have resulted in unexpected taxes. In this case, the change of beneficiaries appears to the IRS as if the new child's grandmother passed down funds as part of her estate plan, or allocation of assets before death, Francis says.

It's best to avoid this complication, she suggests. Francis ultimately advised her client to designate a niece, nephew, or another one of her children as the original beneficiary. 

Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.