You can not invest directly in a 529 plan for unborn children. The two types of 529 plans are college savings plans, which are investment accounts for education expenses, and prepaid tuition plans, which allow you to buy credits at participating schools for future college costs. Beneficiary eligibility requirements can differ between the two types, but both require that the beneficiary has been born. However, you can indirectly begin a 529 plan for an unborn child by naming a different beneficiary for the plan temporarily.
College Savings Plan Eligibility
The eligibility requirements for beneficiaries of college savings plans are broad. A beneficiary simply needs to be a living United States citizen or resident alien with either a Social Security number or a federal tax identification number. College savings plans have no age restrictions on beneficiaries, so that an infant with the proper documentation can be a 529 plan beneficiary. Many plans have minimum initial contributions of only $25 to $50, making it easy to launch an account, according to SavingForCollege.com.
Prepaid Tuition Plan Eligibility
Prepaid tuition plans typically have more strict requirements on beneficiary eligibility than college savings plans do. Many require that either the account owner or the beneficiary be a resident of the state that sponsors the plan. A prepaid tuition plan usually is only applicable at a list of schools within the state that sponsors it. In addition, prepaid tuition plans sometimes have a minimum age or grade level for beneficiaries.
A 529 plan offers flexibility that allows some strategic maneuvering before a child is born to start an account that will ultimately benefit the child. Account holders can switch the beneficiary of a 529 plan account without penalty if the new beneficiary is in the same family as the previous beneficiary, according to the IRS. In this way, a parent could start a 529 plan for one member of the family, such as a spouse, and then change the named beneficiary of the plan to the child once he has been born.
Potential Beneficiary Charge Penalties
A switch of beneficiaries may trigger a tax charge if the new beneficiary is not a member of the previous beneficiary's family. Family member designation includes spouses, children, siblings, parents, nephews and nieces, aunts and uncles, in-laws and any of their spouses. It also includes first cousins. If the beneficiary change does not stay within the family, the change will be viewed as an unqualified distribution from the account and the earnings in the account will be subject to ordinary income taxes and a 10 percent tax penalty.
- College Savings Plan Network: Common 529 Questions
- Internal Revenue Service: Tax Benefits for Education
- Internal Revenue Service: Qualified Tuition Plans
- Investment Company Institute: Understanding 529 Plans
- Financial Industry Regulatory Authority: Smart Saving for College
- Boston Globe: Setting Up a 529 For an Unborn Child
- Reuters: Should You Buy a 529 For Your Unborn Grandchild?
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.