Can a 529 Plan Be Rolled Over?

529 plans offer college savers valuable tax advantages. Investment earnings grow tax-free, while withdrawals made for qualified expenses will not incur federal income tax or an additional 10% penalty tax.

People choose to rollover their 529 plans for various reasons. Perhaps they have moved to a state which offers tax deductions on contributions, or have different financial goals in mind for saving.

Taxes

While federal laws allow one tax-free rollover every 12 months, some states may require you to repay any state income tax deductions or credits on previous contributions when moving funds from one 529 plan to another state’s 529 plan – known as recapture tax and which could have serious ramifications on financial aid eligibility.

Alternative Options You could withdraw funds from your current 529 and transfer them without incurring penalties – however this process can be complex so be sure to consult the rules in your state for guidance on this matter.

Moving funds between Coverdell Education Savings Accounts and 529 college savings plans doesn’t carry any tax implications; you can even redeem Series EE and I bonds held in your name to move them tax-free into one 529 plan – up to $300,000 total tax-free! Be mindful that assets held by beneficiaries of 529s may hinder financial aid eligibility more severely than assets held in parent names.

Beneficiary changes

Parents often change the beneficiary on a 529 plan in order to reduce taxes. According to state regulations, beneficiaries may change at any time, including once their child graduates or no longer attends college – however they must be an eligible family member such as spouses, siblings, parents, grandparents, children or grandchildren.

Families may transfer their 529 funds to another plan. This process can be repeated several times each year, provided it involves rolling them over into an identical account in the same state or another plan that provides tax savings.

The new owner may also choose to modify their investment options, though this option may not be permitted often. Annual limit rules typically prevent accounts from making more than two changes each year – however there are exceptions; one such instance would be when changing beneficiaries which can be done at any time without incurring penalties.

Requirements

Rollover funds must meet certain restrictions. Once every year and within 60 days, one 529 plan can only be rolled over into another 529 plan; you cannot change beneficiaries to non-family members and must provide funds directly to eligible family members like siblings/step-siblings, parents, grandparents, cousins, aunts or uncles as beneficiaries; spouses of eligible family members can also become beneficiaries.

One option for unneeded college savings would be converting them to a Roth IRA, as this will allow the account owner to keep growing investments tax-free for retirement while avoiding income taxes and the 10% penalty applicable when withdrawing them from 529 plans.

Before making this move, please consult with a tax professional as it could result in state-level recapture taxes and penalties. In addition, check state laws; some require you to repay past state tax deductions on your return.

Limits

Rollovers may not always be the optimal option. For instance, changing beneficiaries on a 529 plan allows for immediate transfer without incurring federal income tax and penalties of 10% due to being used for non-qualified expenses.

Before initiating a rollover, it’s wise to consult a tax professional in order to avoid any potential issues. Please also remember that only one rollover per beneficiary per 12-month period can be completed successfully.

Though 529 plans may seem straightforward, it’s essential to keep in mind that they should only be used to pay for certain college-related expenses. If you withdraw funds for other purposes than these qualified expenses (tuition, room and board, books and fees). Non-qualified expenses like technology purchases, travel or monthly gym membership don’t qualify.


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