Our 2 kids are in college now (19 years old). I have an individual 529 (I am owner) and each kid is named as beneficiary. Parents and grandparents want to reduce their estates and are paying tuition direct to school. Wife and I are paying room, board, etc with our own money.

I envision wanting to fund the 529s now for our future grandkids (just as my parents are paying for my kids school, I want to be able to do the same for their kids).

I am reading that I can change the beneficiary with no problems. If it's not family, then it's a distribution / pay tax +10% on it. But if it's family, I'm reading that there's no 529 distribution / no tax from that. But then I hear about 'generation skipping tax' and gift tax because the beneficiary is moving down a generation?

Can I / should I make the kids the owners of the account with themselves as beneficiary? Then when they are 30 - 40, married with kids, they can change the beneficiary from themselves to their kid(s)? can an owner be the beneficiary also?

does any of this make sense?

Most but not all 529 plans accept requests for an owner change. There's no problem with having the same person as owner and beneficiary. When/if your child were to change beneficiary to your (future) grandchild, the value of the account is considered a gift to the new beneficiary. Who is the gift from, you might ask? Current rules say the gift is from the old beneficiary. IRS may change this and have the gift come from the account owner. It doesn't really matter in your scenario because owner and beneficiary would be the same at that point.

Even if you were to remain owner, changing beneficiary from your child to your (future) grandchild under the current rules would not be generation skipping, because you are dropping just one generation, not two.

Just because you are not using the 529 account to pay for college now doesn't necessarily mean you cannot take tax-free withdrawals now. Nothing says you have to be able to trace the 529 money to the payment of college expenses.

Joe

mrenna, I hope you are taking full advantage of the American Opportunity Tax credit for the college expenses you are paying yourself for which you are NOT seeking reimbursement from a 529 account.

And Joe, in all due respect, but have you been nipping at the sauce, or what? Please explain your last parpagraph, "Just because you are not using the 529 account to pay for college now doesn't necessarily mean you cannot take tax-free withdrawals now. Nothing says you have to be able to trace the 529 money to the payment of college expenses." Maybe I'm misinterpreting what you are saying here, but I thought the tieing of qualified college expenses to tax-free withdrawals is the entire basis behind the 529 program. Or are you talking about timing of withdrawals?

Dopps, not saucing it, in spite of recent Syracuse loss.

From IRS Publication 970:
"Figuring the Taxable Portion of a Distribution"
"To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses."

So yes, distributions are tied to qualified expenses, but they are not TRACED to payment of qualified expenses. Provides a lot of flexibility.

Let's say your child is eligible for a subsidized federal student loan when you have tuition money in a 529. Take the loan to pay tuition. Distribute and pocket the 529 money. It's still tax-free (except for any tax credit adjustment).

Joe

Joe: OK, I guess I misunderstood. Your point here is that there does not have to be a direct paper trail of the money flowing out of the 529 and straight into the college's hands.

But there still has to be an incurred qualified expense in order to take money out of a 529 tax-free, regardless of whether said money goes straight to the institution or as a reimbursement into the pocket of the person who paid the institution. Maybe it's me who needs to be saucing.

Dopps, yes there has to be incurred qualified expense. Beyond that, no particular requirements on who receives the 529 dollars and what they are actually used for. Perhaps IRS will some day tighten up these rules, although I hope not as that would just complicate things. Cheers.