An older couple works with a financial planner.

Beware of 5 Myths About Changing a 529 Plan Beneficiary

Yes, parents can set themselves up as the beneficiary of a college savings account.

An older couple works with a financial planner.

Owners of 529 plan accounts should consult their state's tax rules before changing beneficiaries or transferring money to another college savings account.

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There will be times that, for one reason or another, a child may not be able to use any or all of the money saved in a 529 plan, a tax-advantaged college investment account. The reasons range from scholarships to making a decision not to attend college.

In these cases, parents may want to consider changing the beneficiary, the person designated by the account owner to use the 529 plan account.

Parents or grandparents generally contribute to 529 plan accounts because the money grows without the federal tax normally charged on investment earnings. In order for the account to be used at a later date, a beneficiary has to be named. A beneficiary is the person allowed to use the 529 plan funds. Normally, the named beneficiary is a son, daughter, grandson or granddaughter.​

But there's a lot of confusion surrounding changing beneficiaries. Experts dispute the following myths:

[Consider these four questions before opening a 529 plan.]

1. You can't set up the beneficiary as yourself.

False. "Yes, you can, and you can change the name to a new beneficiary when you're ready," says Clare Levison, a certified public accountant and author of "Frugal Isn't Cheap." 

Parents could be unsure how they are going to divide college savings among multiple children or want to save for a child that has yet to be born. In those situations, a parent may want to keep him- or herself as the account beneficiary, Levison says. The beneficiary's name can be changed later.

2. There will be federal tax consequences.

Not true in most cases. A circumstance where there would be federal taxes charged for changing a beneficiary is if a grandparent were the beneficiary of a 529 plan account. If the grandparent was the beneficiary on a 529 plan account and the beneficiary was changed to a grandchild – or another beneficiary more than one generation younger than the current beneficiary – there would be a tax owed, known as the "generation-skipping" tax, after death as part of estate taxes. But this tax is generally only charged to those with estates larger than $5 million, Levison says.

3. There will be state tax consequences.

This one can be true. Each state’s rules can be different, says Ted Sarenski, a New York-based certified public accountant and personal financial specialist.

Up until April, the generation-skipping tax applied no matter what in New York state, he says. Account holders who roll over leftover money into a new beneficiary's account in a new state might have to pay a state tax penalty via a tax recapture, he says, which is the state asking for money you saved via past income tax deductions or credits on 529 plan distributions from previous years.

Before changing beneficiaries or transferring money to another 529 plan account, 529 plan owners should check their state's tax rules on their state's treasury website.

[Watch for changes in state tax benefits for college savings in 2014.]

4. You have to change beneficiaries to avoid the tax penalty for withdrawing funds for nonqualified education expenses.

Not always true. Often, families change beneficiaries because the older child finished college and has money left over. But the account owner doesn't necessarily need to change the beneficiary to avoid tax penalties, says Levison.

Sometimes a family may pay taxes on funds but not a penalty. Tax penalties aren't charged if the money withdrawn is equivalent to the amount of employer tuition assistance, scholarships or veterans education assistance, she says. However, federal tax may be charged on the earnings, as it would have been charged if the money was invested outside of a 529 plan, she says.

5. Leftover money is the only reason to change a beneficiary.

Not true. Sometimes a grandparent will change the name of a beneficiary because the original beneficiary has a substance abuse issue, is extremely immature or otherwise hasn't earned their 529 money via good behavior, says Jean-Luc Bourdon, a California-based certified public accountant and personal financial specialist. If the child cleans him- or herself up or changes behavior, the grandparent may change the name back to the original beneficiary at a later date.

[Learn the five smart moves grandparents can make to help with college savings.]

Often, families will never have to change a beneficiary, Bourdon says. More often than not, families haven't saved the full amount for one child's education, he says. The reasons range from available family finances to just wanting the child to contribute to their own education. However, if families do change beneficiaries, they need to know when it will and won’t cause tax penalties.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.