If the child who is the beneficiary of a 529 plan dies, the account does not close automatically and the money does not go to the child’s estate. The account owner keeps control of the balance and generally has two choices: name a new beneficiary who is a qualified family member and keep the tax-advantaged status intact, or withdraw the funds and pay income tax on the earnings. Because the beneficiary has died, the 10% federal penalty that normally applies to non-qualified withdrawals is waived.1IRS. Instructions for IRS Form 5329 – Section: Part II—Additional Tax on Certain Distributions From Education Accounts and ABLE Accounts
Which path makes sense depends on whether anyone else in the family could use the money for education. The tax consequences are very different.
Naming a New Beneficiary
Changing the beneficiary is usually the most tax-efficient option. As long as the new beneficiary is a qualified member of the original beneficiary’s family, the change is not treated as a taxable distribution, and the earnings continue to grow without being taxed.2Office of the Law Revision Counsel. 26 U.S. Code § 529 – Section: Change in designated beneficiaries
Qualified family members of the original beneficiary include the:3Office of the Law Revision Counsel. 26 U.S. Code § 529 – Section: Member of family
- Spouse
- Children or descendants
- Siblings, step-siblings, or their children
- Parents, step-parents, or ancestors
- Aunts or uncles
- Specific in-laws
- First cousins
One thing to watch. If the new beneficiary belongs to a younger generation than the child who died, the change can trigger gift tax or generation-skipping transfer tax consequences, even though the income tax benefits of the plan itself remain intact.
Withdrawing the Money
If you take the money out instead, the withdrawal is non-qualified because it is not being used for education. The portion that represents your original contributions comes out tax-free, since that money was already taxed before it went in.4IRS. Tax Topic No. 313, Qualified Tuition Programs (QTPs) The earnings portion is taxed as ordinary income to whoever receives the distribution.5Office of the Law Revision Counsel. 26 U.S. Code § 529 – Section: Distributions
Non-qualified withdrawals normally also carry a 10% federal penalty on the earnings.6IRS. Notice 2024-23 – Section: II. BACKGROUND The death of the beneficiary is a specific exception. The regular income tax on the earnings still applies, but the 10% penalty is waived.1IRS. Instructions for IRS Form 5329 – Section: Part II—Additional Tax on Certain Distributions From Education Accounts and ABLE Accounts
After the distribution, the plan administrator will send Form 1099-Q.4IRS. Tax Topic No. 313, Qualified Tuition Programs (QTPs) Box 1 shows the total amount withdrawn and Box 2 shows the earnings portion.7IRS. Instructions for IRS Form 1099-Q – Section: Box 1. Gross Distribution The person who received the money uses those figures to report the taxable amount on their return.
Handling the Change With the Plan Administrator
Whether you are switching beneficiaries or cashing out, the next step is the same: contact the plan administrator. Each state’s plan has its own forms and its own timeline for processing.
Administrators commonly ask for an official death certificate to verify what happened. That documentation matters especially for a withdrawal, because it is the proof that qualifies you for the waiver of the 10% penalty. Once the paperwork is reviewed and approved, the plan manager updates the beneficiary on the account or releases the funds.