Can A 529 Plan Be Rolled Over?
Wednesday, October 4th 2023
A 529 Plan (1) can be an invaluable savings instrument for parents and students planning future educational expenses, yet one question often raised is “Can a 529 Plan Be Rolled Over?” While yes it can, its effects and implications are more complicated than simply answering it yes; therefore, this post will discuss its various complexities along with applicable regulations to shed more light.
Understanding the 529 Plan
Before diving headlong into 529 Plan rollovers, it’s crucial that one establishes a firm understanding of what exactly a 529 Plan entails. Also referred to as qualified tuition plans (QTP), 529 plans offer tax-advantaged savings plans designed specifically to aid college saving – their name comes from Section 529 of the Internal Revenue Code which authorized these savings plans back in 1996.
529 Plans are sponsored by states, state agencies, or educational institutions and can be divided into two distinct types – prepaid tuition plans and college savings plans. Both plans allow money to be saved toward qualifying educational costs later, yet differ based on cost, risk profile, and usage rights.
Rollover Basics and Rationale
Rollover of assets between 529 plans can be beneficial when seeking more attractive investment options or reduced fees within another plan, or additional benefits offered. Families seeking such moves could use rollover as an asset transfer strategy that takes no tax penalty into consideration.
Your circumstances could change and necessitate a rollover, such as moving states with more advantageous tax rules for 529 plans or your beneficiary attending an out-of-state school requiring them to enroll in one. A rollover may be advantageous in these instances.
Regulations Concerning 529 Plan Rollovers
There are various regulations you should keep in mind when contemplating a 529 Plan rollover.
- Frequency of rollovers: According to Internal Revenue Service regulations, each 529 plan account may make one tax-free rollover every 12 months; any subsequent rollovers could incur taxes.
- Same beneficiary requirement: Under IRS regulations, tax-free rollovers must benefit either one beneficiary, or their family as defined by them.
- 60-day rule: In order to avoid taxes or penalties upon withdrawal of funds from a 529 plan for rolling them over into another plan, any transfer should take place within 60 days from withdrawing.
- Non-qualified withdrawals: Any non-qualified withdrawals not rolled over are subject to income tax and an additional 10% federal penalty tax.
How to Execute a 529 Plan Rollover
- Select the new 529 plan: Once your objectives, risk tolerance, and any state tax considerations have been considered, select an ideal 529 plan that matches them all.
- Initiate the rollover process: Contact the new 529 plan’s manager and inform them of your desire to rollover funds. They will provide all the forms necessary for you to complete this process; and you may choose either direct or indirect rolling over. With direct rolling, money from the old plan provider goes directly into the new one; with indirect rolling, distributions will arrive and must be deposited within 60 days into your new 529 account.
- Complete the rollover: Submit all required paperwork, transfer funds within the allotted time, and keep records for tax records of each transaction made during this step of transitioning your 529 plan account to another 529 account.
Risk and Benefit of Rollover of 529 Plans
As with any financial decision, rolling over a 529 plan carries both potential advantages and drawbacks. On one hand, rolling it can offer more attractive investment choices, lower fees, tax benefits, and make savings plans even more efficient; additionally, rolling can help if funds no longer belong to their original beneficiary’s plan; they could instead be transferred over to someone else in your family who needs them instead.
On the other hand, rolling over 529 plans can be both complicated and time consuming, potentially opening you up to market risks as well as tax penalties if conducted incorrectly. Furthermore, not all plans accept rollover contributions so before choosing your new 529 plan it must accept rollover contributions to be successfully transferred over.
Rollovers and Changing Beneficiaries
529 Plans offer another form of flexibility by enabling beneficiaries to change. Should your original beneficiary no longer require funds for educational expenses, transferring ownership can easily be moved over to someone else within your family – such as sibling, stepsibling, niece, nephew, first cousin of original beneficiary. You could even name yourself as a beneficiary if you plan on furthering your education.
In this way 529 plans be used as tools to plan your estate. The parents or grandparents could set up the plan and alter beneficiaries in the event of a change in circumstances or move the plan to a different family member’s plan – making the 529 a highly flexible educational savings plan that you can fund costs for college.
529 plans can certainly be rolled over, providing greater flexibility for their owner. While the rollover process requires adhering to several regulations and requirements, this process gives an opportunity to modify your investment strategy or adapt quickly to changing circumstances while optimizing benefits from this powerful college savings vehicle. However, any decision to undertake a rollover should be carefully evaluated in terms of risks versus benefits before undertaking one – perhaps with the assistance of a financial advisor.
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