Ask an Expert: How Can I Move My Funds From One 529 Plan to Another Without Incurring Taxes?

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 529 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 current beneficiary of your plan may decide not to pursue higher education, and you may decide to transfer funds to the new beneficiary.

The account owner can roll over assets from one 529 plan into another 529 plan. If a rollover satisfies the following conditions, you will not incur any tax consequences:

1. It must be the only rollover to another 529 plan for the same beneficiary within a 12-month period.
2. The rollover must occur within 60 days of the withdrawal for the distribution not to be taxable.

Most 529 savings plans facilitate direct transfers to a new account without liquidating the plan assets and mailing you a check. Transfers must be completed within 60 days to avoid any tax consequences. 

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 which you previously received a deduction.

If you wish to use the funds in a 529 plan for another beneficiary, you have two options. You can change the designated beneficiary of an existing 529 plan, provided that the new or updated beneficiary is a family member of the existing beneficiary. This is not considered a rollover, so it does not restrict your ability to roll over these funds to another 529 plan within the same 12-month period.

Alternatively, if the new beneficiary has an existing 529 plan, you can roll over the funds to their 529 plan. The new beneficiary must be a member of the original beneficiary’s family.

According to IRS Publication 970, Tax Benefits for Education, a member of the family of a 529 plan beneficiary includes the beneficiary’s:

1. Spouse
2. Son, daughter, stepchild, foster child, adopted child, or a descendant
3. Son-in-law, daughter-in-law
4. Siblings or step-siblings
5. Brother-in-law, sister-in-law
6. Father-in-law, mother-in-law
7. Father or mother, or an ancestor of either; stepfather or stepmother
8. Aunt, uncle, or their spouse
9. Niece, nephew, or their spouse
10. First cousin

Read more: How to transfer 529 plan funds to a sibling