Parents can transfer 529 plan savings from one child to another without tax consequences by doing a plan-to-plan rollover or a beneficiary change. This flexibility is ideal for growing families and those who are uncertain about the future. However, some important factors must be considered to ensure a smooth transition of 529 plan money between siblings.
529 plan rollover versus beneficiary change
You might want to transfer 529 plan savings from one child to another for many reasons. Some parents start with a single 529 plan account for their first child and want to split up the funds after the next baby is born. Or maybe one of your children decides not to go to college, and you want to transfer the money to a another sibling who will.
If both siblings have 529 plans, you might want to consider a rollover. The distribution will be tax-free if the same amount is contributed to the other sibling’s 529 plan within 60 days. The IRS allows one tax-free rollover in a 12-month period.
Another option is to change the beneficiary on the 529 plan account. 529 plans allow the account owner to change the beneficiary to a qualifying family member of the current beneficiary without tax consequences. This includes the beneficiary’s:
- Brothers and sisters
- Stepbrothers and stepsisters
- Foster children and adopted children
- Nieces and nephews
- Aunts and Uncles
- Son-in-laws, daughter-in-laws, father-in-laws, mother-in-laws, brother-in-laws, or sister-in-laws
- First cousins
You can find rollover forms and change of beneficiary forms on your 529 plan’s website. To complete the form, you’ll need the account number, name and contact information for the current account owner, and the name, date of birth and Social Security Number or Taxpayer Identification Number for the new beneficiary if making a change.
Here are a few additional things to consider when transferring 529 plan funds:
Investment options
The rollover or beneficiary change form will also ask if you want to change the investment options in the account, which is something you should consider if there is a large age gap between siblings.
Most plans offer age-based investment options that will automatically adjust allocations over time as your child gets closer to college. Age-based portfolios start out heavily weighted toward equities and shift toward more conservative investments as the child enters their teen years.
Your plan may also offer static portfolios, which have to be manually changed. These may be target portfolios that combine different investments to meet certain objectives, or individual mutual fund portfolios.
You can select more than one static portfolio to transfer your 529 plan funds in to by selecting a portion (either a dollar amount or percentage) to contribute to each investment option. If you decide to invest in static portfolios, just be sure to review your account regularly and make any necessary changes as the beneficiary gets closer to college.
Account owners are able to make two investment changes within a 529 plan account during a calendar year.
529 plans can also be used to save for K-12 tuition. You may wish to open a new plan for K-12 tuition, since the time horizon is different when you are saving for college vs. elementary and secondary school.
State tax benefits
If one sibling has an out-of-state 529 plan and you’re moving the funds to an in-state plan, you might qualify for a state tax deduction. For example, if you’re married and live in Nebraska, you can deduct up to $10,000 per year (if filing jointly) from your taxable income for contributions to a Nebraska 529 plan. This includes the contribution and earnings portion of funds that were rolled over from an out-of-state plan.
Illinois residents who rollover funds from another state’s plan can deduct the contribution portion of the distribution but not the earnings. However, if a deduction is claimed, outbound rollovers are sometimes subject to state tax recapture. Be sure to check your state’s rules regarding 529 rollover contributions.
See also:
- How to Spend Leftover 529 Plan Money,
- How to Move Money from One 529 Plan to Another without Incurring Taxes and
- How to Switch 529 Plans
For other situations where you might wish to roll over a 529 plan, read When should you switch 529 plans?
