Ask an expert: How can I move my funds from one 529 plan to another without incurring taxes?

Marguerita M. ChengBy: Marguerita M. Cheng | 

The IRS allows one tax-free rollover of a 529 account per beneficiary in a 12-month period. If you violate the 12-month rule, the transaction is considered a non-qualified distribution and subject to federal income tax, not to mention a 10% penalty on the earnings.

There are numerous reasons for considering a change in plans. For example, you may prefer a plan with lower investment management fees; you may prefer a plan with more robust investment options; you may relocate to a state with more favorable tax benefits for contributions to a 529 college savings plan; you may want to consolidate your 529 plan assets; you may want to switch from your state’s 529 prepaid tuition plan to your state’s 529 college savings plan or vice-versa; or the beneficiary of your plan may decide not to pursue higher education and you decide to transfer the plan's assets to another beneficiary.

When should you switch 529 plans?

You are permitted to rollover assets from one 529 plan into another 529 plan.

If a rollover satisfies the following conditions, you will not incur any tax consequences:

  1. You are permitted only one rollover to another 529 plan per twelve-month period for the same beneficiary.
  2. You are permitted to rollover a 529 plan to a family member of the beneficiary. There is no restriction on the number of times this can occur in any twelve-month period. Please refer to IRS Publication 970 for clarity regarding the definition of a family member (see details below).
  3. The rollover must occur within 60 days of the distribution for the distribution to not be considered a taxable distribution.
  4. You can change the beneficiary of an existing 529 plan provided that the new or updated beneficiary is a member of the family of the old or previous beneficiary.

*Please note that transfers between siblings are not considered rollovers, so moving around within an existing 529 plan does not affect your ability to pursue a rollover.

The magic of beneficiary changes

Most 529 savings plans facilitate direct transfers, without liquidating the plan assets and mailing you a check. In order to avoid any tax consequences, direct transfers must be completed within 60 days. It is worth noting that some states may assess a recapture tax on past tax deductions for out of state rollovers. In other words, when you roll over assets in another state’s plan, you may be required to pay the state income tax on any contributions for you which you previously received a deduction.

According to IRS Publication 970, Tax Benefits on Education, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary:

  1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
  2. Brother, sister, stepbrother, or stepsister.
  3. Father or mother or ancestor of either.
  4. Stepfather or stepmother.
  5. Son or daughter of a brother or sister.
  6. Brother or sister of father or mother.
  7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
  8. The spouse of any individual listed above.
  9. First cousin.
Marguerita M. Cheng

Marguerita M. Cheng

CFP, CEO of Blue Ocean Global Wealth
Marguerita M. Cheng is the CEO and Co-Founder of Blue Ocean Global Wealth. She is a candid and passionate supporter of financial literacy and capability and is quoted and featured in numerous national publications. As a CFP Board Ambassador, Marguerita helps educate the public, policy makers, and media about the benefits of competent, ethical financial planning. She also teaches financial planning and investment management at the Personal Finance Institute at George Mason University, where she helps educators enhance their understanding of economics and personal finance. Prior to co- founding Blue Ocean Global Wealth, she was a Financial Advisor at Ameriprise Financial and an Analyst and Editor at Towa Securities in Tokyo, Japan. She studied at Keio University in Tokyo, Japan, and earned her B.S. in Finance and her B.A. in East Asian Language and Japanese Literature from the University of Maryland, College Park. Marguerita is a recipient of the Ameriprise Financial Presidential Award for Quality of Advice and the prestigious Japanese Monbukagakusho Scholarship.