Tips for Completing Your 529 Rollover
Key facts
- Subject to certain limitations, one state’s 529 plan generally can be rolled over to another state’s 529 plan or another plan in the same state.
- Subject to certain limitations, rollover options include requesting a direct transfer of assets through the new plan or taking a distribution from the current plan and contributing the full amount to the new plan.
- It is also common practice to rollover a UGMA/UTMA account to a 529 plan.
One of the primary reasons 529 plans are so popular is the wide variety of choices you have when it comes to where to invest your savings. Each state has designed its own version of the program, and states often make improvements over time in an effort to attract your business. When you notice that another 529 plan is a better choice than your current program, you can complete a 529 rollover to take advantage of the additional benefits.
When Does a 529 Rollover Make Sense?
If you did your research before opening your 529 account, you are probably already in a plan that offers a fee structure and investment options that satisfy your needs. You may also have enjoyed tax credits specific to your state. However, plans do change, and you may discover that another option better fits your situation. Rolling funds from one state’s plan to another state’s plan is the most common use of the rollover process, and in some cases, account owners choose to roll accounts over to another plan administered by the same state.
Before you make a final decision, check your current plan’s rules to see if a rollover fee applies. Review your state’s 529 plan regulations as well. If you received a state tax credit for your 529 contributions, you may be required to repay it – and you may not be eligible for similar tax benefits in the new plan. These expenses will figure in to the bottom line benefit you will see as a result of rolling funds over to a new plan.
In some cases, it may make sense to rollover a UGMA or UTMA account into a 529 plan. First of all, the tax benefits are quite different between the two types of accounts. Only the first $1,050 or earnings are tax-free for UGMA/UTMA, whereas all 529 earnings are tax-free at the federal level if used for qualified expenses. Secondly, UGMA/UTMAs are typically considered student assets whereas 529 plans are typically not. Since student income is weighed more heavily than parental income for financial aid, this may be another reason to rollover a UGMA/UTMA to a 529 plan.
Tips for Completing Your 529 Rollover
If you have considered the potential limitations to rollovers and determined that a roll-over makes sense, here are several methods of completing your 529 rollover:
| Rollover Method | Steps |
| Funds Transfer Between Plans | Complete the rollover application provided by your new plan. The new plan administrators will handle the funds transfer. |
| Distribution and Contribution | Subject to your plan administrator’s policies, take a distribution from your current plan and use the funds for an initial contribution in your new plan. Funds must be returned to a 529 account within 60 days to protect the account’s tax-advantaged status, and your new plan will require a breakdown of contributions and earnings. |
Keep in mind that 529 plans permit one rollover every 12 months. However, if you feel compelled to conduct two rollovers within one year, you can still make the second transaction without penalty if you are also changing the beneficiary to a qualified family member if you choose a different beneficiary at the same time. In this case, the second rollover would not count towards the once-per-year rule.
The most important thing is to keep an eye on the bottom line. Make sure the new plan’s benefits outweigh any fees or tax ramifications involved in withdrawing funds from your current 529 account.
Disclosure
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.
Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.