How to roll over a 529 plan, and why it may be a good idea

|
Baby graduate
Image Credit: Dreamstime
Team Clark is adamant that we will never write content influenced by or paid for by an advertiser. To support our work, we do make money from some links to companies and deals on our site. Learn more about our guarantee here.
Advertisement

When my 10-year-old son was born, his grandmother generously put $1,000 into a Franklin Temple 529 plan for him. A 529 is a tax-advantaged savings plan for educational expenses. This IRA-like vehicle is a great way to help fund a child’s schooling.

For the better part of a decade, I, too, have been funding a 529 for my son. But my account is with Georgia’s Path2College program.

You can set up a 529 account and use it for qualified educational expenses in any state, no matter where you reside. If you live in Georgia, for instance, and you find a 529 plan offered, say, in Florida, with better investment options or lower fees, you could put your money there. But, there is usually a modest tax benefit to having your children’s 529 plans in your state of residence. For Georgia, that deduction is $4,000 per beneficiary.

My son’s original 529 plan had been set up by his grandmother’s long-time broker. Because it was an out-of-state account, we hadn’t been getting a Georgia tax deduction for it. And in reviewing the account details, I noticed it held higher cost investments. With these points in mind, I decided to transfer the Franklin Temple account into my Path2College 529.

Making such a transfer was new to me. Let’s talk about what I learned.

What happens when you roll over a 529 from one plan to another

The IRS allows for one tax-free rollover, per 529 beneficiary in a 12-month period. If you violate this rule, you get hit with federal income taxes and a 10% penalty on the accumulated earnings. Ouch!

The basic method for rolling over one account into another is to fill out a rollover contribution form with the 529 plan servicer you are transferring the money into. From there, the administrator of your preferred 529 plan will coordinate moving the money from the old fund into their fund.

Another method is to request a distribution of funds from the old servicer, and then, within 60 days, deposit the full amount into your preferred 529 plan. If you choose this approach, be sure to let your servicer know that the money is a rollover and give them a breakdown of how much is principal and how much is earnings.

There are a few circumstances where it may make sense to move your 529 plan funds into a different account. One scenario is the one I outlined with my son’s accounts – to make the most of the state tax deduction and to get lower cost investments. You might also want to move if your plan has performed poorly compared to other 529s and you expect the trend continue. Of course, we all know that past performance is no guarantee of future returns, but if most other plans are outpacing yours, you may consider a transfer.

You may also find that a plan is too restrictive. While federal regulations govern all plans, some plans choose to have other specific rules for their plans. One example is the provision that you cannot change the owner of the plan unless the original owner dies or becomes incapacitated. For a grandparent who sets up a 529 account with this provision and later chooses to let a parent manage the account, this can lead to frustration. But, a way to circumvent this provision would be to roll the account over to a new 529 plan that accepts owner changes.

While the 529 program was created specifically to help families save for college, the plans can now be used to pay for private school. The recently enacted GOP tax reform allows beneficiaries to use up to $10,000 in annual distributions from a 529 plan during grades K-12 for things like school tuition and books, in addition to later college expenses.

Before tax reform, 529 plans were a great tool. Now they’re even better. If you’re not taking advantage of this financial planning tool, it’s worth considering.

Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

Advertisement
Wes Moss About the author:
Wes Moss is the host of Money Matters – one of the country’s longest running live call-in, investment and personal finance radio show – on WSB radio. He is the Chief Investment Strategist at Capital Investment Advisors (CIA), and a partner at Wela, a digital financial advisory service. In 2017, Barron's named Wes ...Read more
View More Articles
  • Show Comments Hide Comments