Can a 529 Plan Be Rolled Over?
People save in 529 plans for various reasons. Some states offer tax deductions for contributions and the investments grow tax deferred.
Money may be used for qualified education expenses such as four-year colleges, vocational schools, trade schools and graduate school tuition costs; however, there are regulations concerning transfer or roll over funds and changing beneficiaries.
Many parents set up 529 plans to help pay for their children’s college tuition costs, but sometimes this doesn’t happen as planned due to scholarships or the decision not to enroll at all – resulting in leftover funds in the account.
Rolling over funds from an old 529 plan into a new 529 can provide tax benefits; however, as rules vary depending on where they’re held in an account, it’s wise to consult a certified public accountant (CPA) or fiduciary financial advisor before taking this step.
529 rollover accounts offer another advantage: account owners can change beneficiaries at any time without incurring an additional 15-year holding period. Changing beneficiaries typically involves selecting someone from within their family unit (spouse, sibling, first cousin and descendent).
Beneficiaries may use their 529 funds to cover nonqualified expenses like clothing, entertainment and computers; however earnings from nonqualified withdrawals are subject to income taxes and a 10% penalty. Some states permit funds from these accounts being used towards student loan repayment or advanced degree programs.
Rolling over a 529 plan raises several tax implications. For instance, withdrawing money for non-qualifiable reasons could require paying federal income taxes as well as an additional 10% penalty tax. Furthermore, some states have recapture rules which require you to repay any state tax deductions or credits related to contributions you’ve made in the new account.
Timing withdrawals from a new account can also be tricky, and could prevent you from taking advantage of some major market days that could impact long-term performance.
There are also restrictions on how often and to whom you can roll over a 529 plan; typically one transfer per beneficiary every year. This limit includes both rolling funds from one state’s plan to another as well as within the same plan itself. There may also be limits placed upon how much can be moved between state’s 529 plans as well as between them and Roth IRAs.
Withdrawals from 529 plans that are used for purposes other than qualified educational expenses incur a 10% penalty and income taxes, including withdrawals used to pay expenses related to employment such as training programs, certain coding bootcamps and culinary schools.
As of 2024, it’s now possible to roll over unutilized 529 funds into a Roth IRA after 15 years have elapsed since opening your 529 account – eliminating one of its key drawbacks and potentially encouraging people to save even more with 529 plans.
However, keep in mind that you can only perform one tax-free rollover per beneficiary every 12 months and only to a Roth IRA if the original beneficiary does not include current or future spouse, sibling, parent, grandchild or first cousin of the owner. When considering college savings options it may also be worthwhile transferring the plan’s beneficiary or converting it into an individual retirement account (IRA).
Parents and grandparents dissatisfied with their 529 plans or learning that their child won’t attend college may consider moving the funds into another plan or even a Roth IRA, however there are several key points they need to take into account first.
Rollover rules vary by state. For instance, in some jurisdictions transferring out-of-state plans constitutes a non-qualified distribution and recaptures any applicable state tax deductions. A CPA or fiduciary financial advisor can help explain your options within their specific region.
However, you should also keep in mind that any change to beneficiary can impose income taxes and the 10% penalty, so in most cases it makes more sense to leave an account as is; especially if its balance could potentially be rolled over at some later point.