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The magic of beneficiary changes
http://www.savingforcollege.com/articles/the-magic-of-beneficiary-changes-on-a-529-account

Updated: 2017-08-31

by Joseph Hurley

Financial Professional Content

Changing the beneficiary on a 529 account works magic in at least three situations:

  1. A beneficiary change makes the twice-per-calendar year investment change restriction disappear.
  2. A beneficiary change also makes the once-per-12-month rollover restriction disappear.
  3. A beneficiary change makes possible what might seem impossible: A 60-day "in-state" rollover.

In all three of these situations, an exception is carved out from its respective limitation in Section 529 whenever the designated beneficiary of the account is changed as part of the transaction. Of course, the new beneficiary must be a qualifying member of the existing beneficiary's family.

What does this mean?

  • You can always make an investment change in your current 529 account even if you have already made two investment changes in a given year. All you have to do is request a beneficiary change along with your investment change request.
  • You can always roll over the account to another state's 529 plan even if you have rolled over within the past 12 months. All you have to do is designate a different family member as beneficiary on the receiving account.

The third magic trick described above, a 60-day "in-state" rollover between 529 plans, is less common but nonetheless important. Occasionally, an account owner makes a withdrawal by mistake and wants to get their funds back into their 529 plan without tax or penalty. This may be the solution to that problem.

Your client has 60 days from the date of a 529 withdrawal to make a full or partial rollover of those funds to another 529 plan without tax or penalty. As soon as it becomes apparent that a refund or credit has caused an over-withdrawal, the client should be checking to see if the 60-day window is still open. If it is and they act quickly, they could turn that withdrawal into a rollover to put the money back into a 529 plan, thereby avoiding taxes and penalties.

Normally, a trustee-to-trustee rollover or a 60-day rollover must be to "another" state's 529 plan. But when a rollover is accompanied by a beneficiary change, the funds must go to "a" 529 plan, which presumably includes the same 529 plan or another 529 plan within the same state.

(There's no such thing as a trustee-to-trustee "in-state" rollover. The IRS would consider this to be an investment change, even if switching between two different plans in the same state.)

If the current beneficiary has a sibling, it is a no-brainer. Once the investment change or rollover has been completed, you can simply change the beneficiary back to the original. If there is no sibling, the child's parent could be designated as the new beneficiary. However, a subsequent change back to the child will presumably be treated as a new gift for gift-tax purposes, so be careful with this.

The moral of the story is this: Switch the account beneficiary if you are making one of the changes described above so you can forget about the limitations on investment changes and rollovers.

The above article does not constitute tax advice. Tax matters can be complicated and uncertain and taxpayers should rely on their own tax adviser for advice.

Originally Posted: 2013-12-05

Financial Professional Content

Changing the beneficiary on a 529 account works magic in at least three situations:

  1. A beneficiary change makes the twice-per-calendar year investment change restriction disappear.
  2. A beneficiary change also makes the once-per-12-month rollover restriction disappear.
  3. A beneficiary change makes possible what might seem impossible: A 60-day "in-state" rollover.

In all three of these situations, an exception is carved out from its respective limitation in Section 529 whenever the designated beneficiary of the account is changed as part of the transaction. Of course, the new beneficiary must be a qualifying member of the existing beneficiary's family.

What does this mean?

  • You can always make an investment change in your current 529 account even if you have already made two investment changes in a given year. All you have to do is request a beneficiary change along with your investment change request.
  • You can always roll over the account to another state's 529 plan even if you have rolled over within the past 12 months. All you have to do is designate a different family member as beneficiary on the receiving account.

The third magic trick described above, a 60-day "in-state" rollover between 529 plans, is less common but nonetheless important. Occasionally, an account owner makes a withdrawal by mistake and wants to get their funds back into their 529 plan without tax or penalty. This may be the solution to that problem.

Your client has 60 days from the date of a 529 withdrawal to make a full or partial rollover of those funds to another 529 plan without tax or penalty. As soon as it becomes apparent that a refund or credit has caused an over-withdrawal, the client should be checking to see if the 60-day window is still open. If it is and they act quickly, they could turn that withdrawal into a rollover to put the money back into a 529 plan, thereby avoiding taxes and penalties.

Normally, a trustee-to-trustee rollover or a 60-day rollover must be to "another" state's 529 plan. But when a rollover is accompanied by a beneficiary change, the funds must go to "a" 529 plan, which presumably includes the same 529 plan or another 529 plan within the same state.

(There's no such thing as a trustee-to-trustee "in-state" rollover. The IRS would consider this to be an investment change, even if switching between two different plans in the same state.)

If the current beneficiary has a sibling, it is a no-brainer. Once the investment change or rollover has been completed, you can simply change the beneficiary back to the original. If there is no sibling, the child's parent could be designated as the new beneficiary. However, a subsequent change back to the child will presumably be treated as a new gift for gift-tax purposes, so be careful with this.

The moral of the story is this: Switch the account beneficiary if you are making one of the changes described above so you can forget about the limitations on investment changes and rollovers.

The above article does not constitute tax advice. Tax matters can be complicated and uncertain and taxpayers should rely on their own tax adviser for advice.

Originally Posted: 2013-12-05

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