If you’re unhappy with your current 529 college savings plan, you might benefit from a 529 plan rollover. Maybe you’ve moved to a new state that offers a tax benefit for contributions or your existing plan has high fees.
Whatever the reason, there are some 529 rollover rules and consequences to consider before transferring your funds to a new plan.
Here’s what you need to know about a 529 plan rollover.
Common reasons to consider a 529 plan rollover
There are a variety of reasons why someone might be wondering, “Can I rollover a 529 plan to another 529 plan?”
Common scenarios include:
- Your 529 plan has high fees. 529 savings accounts function the same for the most part. But plan charges (e.g. enrollment and investment fees) can vary greatly among different state plans. For example, some 529 savings plans charge a set annual maintenance fee. Others might charge an annual operating fee based on a percentage of your account balance.
- You recently moved to a state that provides a tax benefit for contributions. If you’ve lived somewhere with no state income tax and recently moved to a place with state benefits for 529 contributions, it might be worth doing a 529 rollover to maximize your tax return. Note that each plan treats incoming rollovers differently.
- You’re juggling multiple state 529 plans and want to streamline your investments. If you’ve bounced around to different states and opened multiple 529 plan accounts for your child(ren), it might be easier to consolidate your different 529 plans into one state plan. Additionally, you’ll reduce your overall costs because you won’t pay account expenses for multiple plans.
- Your user experience is trash. Not all 529 websites are created equal. Many state websites are difficult to navigate, which can make it more challenging to make contributions and manage your investments. Therefore, you might want to switch plans to receive a better investment experience.
You might also be considering a 529 rollover if your child decided that they no longer want to attend college. In this case, you might want to transfer the 529 funds to another eligible child. Fortunately, 529 transfer rules allow you to change beneficiaries at any time. But you might consider a 529 rollover if the new beneficiary already has an existing 529.
529 plan rollover rules
Completing a 529 rollover can be beneficial in some situations. But there some rollover rules might tip the scale when weighing the pros and cons of a 529 plan rollover.
1. You’re limited to one rollover every 12 months per beneficiary
The Internal Revenue Service (IRS) allows for one tax-free 529 plan rollover per 12-month period per beneficiary. If you happen to violate this rule, your rollover is treated as a nonqualified distribution. This means you’ll pay federal income tax and incur a 10% penalty on the earnings portion of your distribution (not the amount you actually contributed).
It’s important to note this rule is based on the beneficiary, not the plan. What does this mean exactly?
Let’s say you recently moved to a new state that offers a tax deduction for 529 contributions. Therefore, you want to rollover your daughter’s 529 plan to your new state’s plan. However, your parents also opened a 529 plan with your child named as the beneficiary.
If your parents completed their own rollover within the last year, your rollover is considered a nonqualified distribution and you’ll be penalized because the time limit is based on the beneficiary.
So, if your child is named as the beneficiary for multiple 529 accounts, make sure no one has completed a rollover in the last 12 months.
2. Some states recapture taxes when you rollover to a different state plan
As long as only one 529 rollover takes place for a beneficiary during the 12-month window, the federal government doesn’t impose penalties for rolling over funds to a different plan. But, depending on where you live, you could end up with a tax bill from the state.
If you’ve claimed a state tax deduction or credit for your 529 contributions, you’ll need to check the recapture tax rules for your state. Some states treat rollover proceeds as a nonqualified distribution. In which case, the outbound rollover might be subject to the recapture of prior state tax benefits on top of incurring state withdrawal penalties.
For example, 529 tax deductions claimed by residents of Colorado and Georgia will be subject to recapture.
However, other states won’t penalize you for a nonqualified withdrawal as long as the funds are contributed to another 529 plan within 60 days.
Note that you can complete a direct rollover or take a distribution and deposit the money into a new 529 plan on your own.
3. You can change beneficiaries at any time and as many times as you want
One of the perks of 529 transfer rules is that you can change the beneficiary at any time without rolling over the funds to a new account. The only caveat is that the new beneficiary must be an eligible family member of the existing beneficiary’s family.
According to IRS Publication 970, this includes the existing beneficiary’s spouse or child (including stepchild, foster child or adopted child). Other eligible family members include:
- Siblings (includes stepsiblings)
- Mother or father (includes stepparents)
- Son or daughter of a sibling
- Brother or sister of a parent
- Immediate in-laws (e.g. son-in-law, mother-in-law, etc.)
- First cousin
It also includes the spouse of any eligible family member listed above.
If you prefer to complete a 529 rollover to a different plan instead of just changing beneficiaries, then you’ll need to weigh how the funds will be treated at the federal and state level.
FAQs for 529 rollovers
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