Dear Liz: I opened a 529 college savings plan for our son and over the years it grew. My son was fortunate to receive a full-ride academic scholarship and therefore much of the money stayed in the plan. Recently my son became a new father to my first grandchild. I know that it is permissible to give five years’ worth of tax-free giving in setting up a new 529 plan for a child. My question is: Can I transfer five years of annual gift-tax-free giving ($85,000) to my grandchild from the account originally set up for my son without incurring a gift tax obligation?

Answer: You’re worrying about the wrong taxes.

Few people need to be concerned about gift taxes, since someone would have to give away more than the current gift and estate tax lifetime limit for any gift to be taxable. That limit is currently $12.92 million.

The annual gift tax exclusion limit is the amount you can give away without having to file a gift tax return. The 2023 limit is $17,000 per recipient, and 529 college savings plans allow you to give up to five years’ worth of annual exclusions at one time, or $85,000. (If you are married, you and your spouse can give up to $170,000.)

A 529 college savings plan can have only one beneficiary at a time, however. With few exceptions — and we’ll get to one of those in a moment — withdrawals are tax free only if used to pay qualified education expenses for the plan’s beneficiary. So the transfer you’re proposing would incur income taxes and penalties.

You can, however, change the beneficiary of the 529 plan to your grandchild. As long as the new beneficiary is a family member of the current beneficiary, there will be no tax consequences, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. The IRS’ definition of family includes the beneficiary’s spouse, children or other descendants, parents or other ancestors, siblings and in-laws, along with aunts, uncles, nieces, nephews and first cousins and their spouses.

You may want to wait a few years, however. Starting in 2024, you’ll have the option to roll up to $35,000 from a 529 to a Roth IRA for your son, subject to annual contribution limits, Luscombe said. If next year’s IRA contribution limit is $7,000, for example, that would be the maximum you could roll into the Roth for the year. Your son also would have to have earned income equal to the amount rolled over.

Taking advantage of this option could be a great way to help your son build tax-free income for retirement before you switch the beneficiary designation to benefit your grandchild.