Can a 529 Plan Be Rolled Over?
Can a 529 plan be rolled over?” is yes; however, each type of move comes with different rules and tax implications. A rollover, transfer or changing beneficiary all have an impactful tax impact that must be considered before proceeding with either option.
At any point in time, an eligible family member such as their spouse; child(ren); sibling or step-sibling; first cousin and their spouses; aunt and uncle may change beneficiaries.
Fees
A 529 plan is a state-sponsored college savings plan. Anyone can open an account for themselves or on behalf of another, acting as custodian until it’s needed for tuition costs.
Owners can make changes to beneficiaries without incurring penalties, and move funds between 529 plans or Roth IRAs as often as desired without incurring tax implications.
The IRS allows only one rollover every 12 months for the same beneficiary, although there may be exceptions to this rule. You could transfer your money to your spouse, another family member or charity as needed – or use it towards educational expenses (e.g. vocational school tuition and K – 12 grades). Any funds used outside of educational expenses would incur taxes and penalties of 10% plus tax due upon withdrawal – potentially impacting financial aid eligibility as well.
Taxes
Federal tax rules allow one penalty-free rollover per beneficiary each year for up to 12 months; after which any distributions will be considered non-qualified withdrawals subject to federal income taxes on earnings plus an additional 10% penalty.
This rule applies whether you opt for direct rollover or manual deposit into another plan. The only exception would be if you changed the beneficiary of the new account to someone outside their eligible family circle, such as children of existing beneficiaries.
Likewise, if you relocate from a state that allows tax deductions on contributions to another that does not, the outbound state could treat your rollover as non-qualified distribution and recapture any prior state income tax benefits on earnings portion of transfer resulting in unexpected tax bills for you or beneficiary. Please refer to our 529 by State guide for more information regarding specific rules applicable in your location.
Beneficiary changes
A new beneficiary could have different investment needs and may require longer for college education costs to accrue, as well as preferring different investing approaches, such as passive strategies.
Beneficiaries who belong to the same generation as your beneficiary can change without penalty; this includes children, grandchildren, siblings and parents but excludes step-siblings, spouses or any other relatives who might also claim that account as theirs.
Rollovers of 529 plans into Roth IRAs are only permitted once every 12-months and must take the form of trustee-to-trustee or plan-to-plan transfers. There remain unanswered questions as to how beneficiary changes affect how the 15-year holding period restarts, so seek professional advice before making that move. Changing beneficiaries down to younger generations could also have tax ramifications that necessitate professional guidance; doing so could require paying taxes on earnings accrued in prior generations.
Consolidation
Change of Beneficiary When changing beneficiaries on a 529 account but keeping the same owner isn’t considered a rollover and doesn’t count against your one tax-free rollover per 12-month period or minimum distribution rules for traditional IRAs; it also doesn’t trigger minimum distribution rules; however, this doesn’t open the way to starting Roth contributions as those are still subject to income limitations.
If your current 529 plan offers poor investment options or you’ve relocated to a state offering tax deductions for contributions, or are simply unhappy with its offerings, rolling over funds may make sense. Just be mindful that the IRS only permits one tax-free rollover per beneficiary per year – anything beyond this threshold may incur penalties from them and/or Coverdell Educational Savings Account or redeem Series EE or I bonds into 529 accounts can’t qualify; only changing beneficiaries on existing 529 plans qualify; unlike changing an account from within one company can.
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