How to Roll a 529 Into Something Else
Parents and grandparents can open 529 plans for children and other family members at institutions offering state plans or using tools like Backer. When possible, contributions can be supersized by making five years’ worth of annual gifts all at once.
Customers can change the account beneficiary to include spouse, children or siblings; pay K-12 tuition or registered apprenticeship programs; offset student loan repayment or use savings as a tax write-off.
Taxes
Most beneficiaries switch beneficiaries in order to move to another state’s 529 plan that offers superior fees or investment choices, or additional benefits such as tax credits that vary based on where the plan operates.
Wang notes that it remains unclear if changing beneficiaries counts as an act of “change of ownership,” which would trigger the 15-year holding period, nor how this might play out for parents who wish to transfer an account to one or more siblings or relatives (such as aunts or uncles or themselves) so it can be used for qualified educational expenses, like graduate school tuition fees or continuing education classes.
This new rollover option comes with some notable restrictions, including Roth IRA contribution limits that apply, as well as earnings made within the last five years not qualifying for tax-free rollover. Also, any withdrawals used for nonqualified expenses will incur an additional 10% penalty fee.
Fees
If your child opts not to attend college, a 529 plan allows you to withdraw its funds without penalty (except a 10% withdrawal penalty on earnings) for other uses – home remodeling projects, wedding expenses or vacation. Please be aware that non-educational withdrawals may be subject to federal income tax.
Change the Beneficiary of your 529 to an Individual: Sibling or Spouse You may also change the beneficiary of your 529 to another family member; however, certain restrictions apply: the new beneficiary must be eligible and of higher generation than your original beneficiary.
A 529 plan can be an excellent choice for saving for education, offering tax-free withdrawals on qualified educational expenses, generous contribution maximums and parental control. But it’s essential to review your options with a financial professional and take into account each family’s unique situation before making decisions. Luckily, new legislation in 2024 makes rolling over 529 assets into Roth IRAs easier.
Investments
529s offer diversified investment options that allow funds to be easily moved between plans without incurring taxes or penalties, and funds may even be converted into Roth IRAs without incurring penalties under new rules; though if redeeming Series EE or I bonds and moving them into a 529, tax consequences must first be addressed before doing so.
Distributions from 529s may typically be free from federal income tax if the funds are used to cover “qualified college expenses,” such as tuition at most accredited two- and four-year colleges as well as some community colleges and vocational-technical schools within the US. Other eligible expenses could include graduate studies or certified apprenticeship programs.
Many states offer 529 programs, which may provide tax deductions or credits on contributions made. But you aren’t limited to these accounts alone – many national brokerages also provide investment-grade 529 offerings and some, like Backer, can even link directly with your 529 account to make saving easier.
Transfers
As well as rolling money between 529 plans, other ways of shifting funds exist. Family and friends may make contributions directly into beneficiary’s accounts without incurring annual contribution limits or incurring tax penalties.
Rollovers and transfers offer many advantages to savers, such as helping avoid state deduction clawbacks or shifting assets into a Roth IRA; it is best to consult a CPA before undertaking either of these options.
Transferring 529 funds can reduce fees, avoid taxes and penalties and preserve financial aid eligibility. Our AboveBoard College Savings Guide can provide more details. Additionally, there are state-sponsored 529s which offer user-friendly features like online platforms for contributors as well as ways for friends and family members to contribute. Finally, this guide also explains how to select an ideal plan suited to your individual situation.
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