Can I Do a Partial 529 Plan Rollover?
Families may rollover all or a portion of their college savings from one 529 plan to another 529 plan. One tax-free rollover is permitted per beneficiary in a 12-month period, and funds must be transferred within 60 days. 529 college savings plans do not charge fees for inbound rollovers or outbound rollovers.
Reasons to do a partial 529 plan rollover
Sometimes it makes sense to split a child’s college savings among more than one 529 plan. Here are some reasons to consider a partial 529 plan rollover:
State income tax benefits. Many 529 plans offer a state income tax benefit for residents who contribute to an in-state 529 plan. In some states, rollover contributions are also eligible. Families who move to a new state, or who had previously been investing in an out-of-state 529 plan, may want to roll funds into the in-state 529 plan and collect a state income tax benefit.
Families who are happy with their original 529 plan might consider doing a partial rollover to the new in-state 529 plan. Most states limit the amount of annual 529 plan contributions that are eligible for a state income tax benefit, so they could rollover the maximum amount that will qualify and leave the remaining balance in the out-of-state 529 plan.
Keep in mind, however, in the case of an outbound rollover any state income tax benefits previously claimed may be subject to recapture.
Transfer college savings to a sibling. A 529 plan can have only one designated beneficiary. Parents may use a single 529 plan to save for more than one child’s college expenses, but they will have to change the beneficiary each time a different child want to take a qualified distribution. Instead, the parents can roll over a portion of the original 529 plan into new 529 plans for each of the other siblings.
There are many benefits to having separate 529 plans for each child. Parents can customize each child’s 529 plan investments based on their age, they may be able to make larger contributions each year, they may qualify for state income tax breaks and it is usually easier to receive and track 529 plan gifts when each child has their own account.
Diversify investments. Each 529 plan offers a choice of investment portfolios with different objectives based on varying levels of risk. Parents with younger children who want to invest more aggressively may select a 529 plan portfolio containing mutual funds or ETFs, which have greater potential return with more risk. But, parents whose children are closer to college age and who want to protect their principal investment might consider a 529 plan with an FDIC insured investment option.
Instead of rolling over their entire 529 plan to a 529 plan with an FDIC insured option, parents may choose to keep some of their college savings assets in the original 529 plan and roll over a portion of their assets into a new 529 plan.
How to complete a partial 529 plan rollover
Families who want to move a portion of their college savings assets into another 529 plan have the option to complete a direct partial rollover or an indirect partial rollover. To complete a direct rollover, a 529 plan account owner must complete a rollover request form on the new 529 plan’s website. The rollover request form must include the amount of the rollover and allocation instructions.
With an indirect rollover, the 529 plan account owner takes a distribution and deposits the funds into a new 529 plan within 60 days. When completing an enrollment application for the new 529 plan, the account owner must indicate that the initial contribution is a rollover contribution and provide a breakdown of contributions and earnings.
If a breakdown is not specified, the entire amount of the rollover is assumed to be earnings. In some states, only the contribution portion of a rollover qualifies for state income tax benefits. Funds must be deposited into a new 529 plan within 60 days or the distribution is considered non-qualified and the earnings portion is subject to ordinary income tax and a 10% penalty.
A good place to start