Rolling Over a 529 Plan
If your child decides not to attend college as planned or you saved more than necessary, rolling over their 529 plan may be an option; however, rules and taxes vary according to each state.
Federal law now permits you to roll over your account once every year without incurring income tax penalties, read on to discover how this change works.
Rollovers refer to the movement of funds from one 529 plan to another without changing beneficiaries, unlike transfers which involve changing beneficiaries of an account. A rollover does not count as distribution and does not incur tax penalties; however, depending on state guidelines it may incur income tax consequences in its destination state.
529 plans offer numerous advantages, with investment earnings not subject to taxes as long as they’re spent on qualified education expenses such as tuition fees, books and room and board. But this savings plan comes with risks: you must withdraw unused investments within 60 days or face income taxes and a 10% penalty fee.
New rules will make 529s more appealing to savers by permitting them to convert unused funds directly to Roth IRAs without incurring a 10-percent penalty. Unfortunately, however, this move could also have unintended repercussions in that it encourages market timing: investors shifting strategies in response to large market fluctuations which may have detrimental effects in the long term.
The 529 plan offers tax advantages for college savers: investment earnings don’t count toward your taxable income if they’re spent on qualified education expenses, such as tuition fees, books and room and board costs. Furthermore, 529 accounts allow savers to change beneficiaries of accounts with certain restrictions attached.
Your 529 plan can only be transferred once every year; any additional transfers will incur income tax charges on their distributions.
Move Your Money to Another State’s 529 Plan When moving funds between states’ 529 plans, be careful to avoid paying taxes and penalties. Transferring while keeping the same beneficiary may work but only once every year before penalties apply and taxes become payable. Alternatively, shifting beneficiaries to someone different allows you to take advantage of state tax deductions while safeguarding means-tested government benefits eligibility for loved ones.
State tax deductions
529 plans can provide different tax benefits depending on the state in which they’re purchased. For instance, New York allows taxpayers filing jointly to deduct up to $10,000 annually from their taxable income for contributions made and earnings withdrawals used towards qualified higher education expenses.
However, when withdrawing funds from a 529 to pay for non-qualifiable expenses such as tuition costs or housing, any amount invested becomes taxable and subject to a 10% penalty. Furthermore, some states impose restrictions on how much of a distribution can be reinvested back into the plan.
Furthermore, certain states allow families to contribute up to $85,000 per year without incurring gift tax consequences. Furthermore, some states offer deferred gift rules which allow funds to be withdrawn after five years and reinvested without penalty; this feature can be particularly helpful for beneficiaries attending college within the near future.
When rolling over a 529 account, make sure that you follow all applicable regulations in order to avoid taxes and penalties. There are specific guidelines regarding when and who you can transfer the funds.
As an example, you can switch the beneficiary of a plan to any eligible family member, such as spouses, siblings, first cousins and descendants. But transferring funds to someone outside this list would incur gift and generation-skipping tax consequences.
Many parents save in 529 plans to help their children pay for college. But sometimes the child doesn’t attend as expected or graduates with lower debt than expected. Now thanks to a new law signed into effect in December 2022, families can transfer extra 529 plan funds directly into a Roth IRA without incurring taxes or penalty fees; it is truly remarkable news.
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