How to transfer 529 plan funds to a sibling
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. But in order to ensure a smooth transition of 529 plan money between siblings, there are some important factors to consider.
[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 in which you might wish to rollover a 529 plan, read When should you switch 529 plans?]
529 plan rollover versus beneficiary change
There are many reasons why you might want to transfer 529 plan savings from one child to another. 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. Some parents start a single 529 plan expecting one baby and then have twins or other multiples. 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 as long as 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, but they will have to be printed and either mailed or faxed in. To complete the form, you’ll need the account number, name and contact information for the current account owner, the name of the current beneficiary, and 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:
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.
Suppose you have a five-year-old son and you are expecting another baby. Your current 529 plan is invested in an age-based portfolio designed for children who are five to eight years old, so it makes sense to open a new plan for your new baby. You can open a new 529 plan before the child is born if you make yourself the beneficiary and change it to the child once you have their Social Security Number. Keep in mind, however, that you may not be able to select an age-based plan for a newborn child while an adult is the designated beneficiary. In this case, you may want to start out in an aggressive static portfolio and switch to an age-based investment option after the baby becomes the beneficiary.
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. If you’re married and live in Nebraska, you are eligible to deduct up to $10,000 per year (if filing jointly) 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, in some cases outbound rollovers are subject to state tax recapture if a deduction was claimed. Be sure to check your state’s rules regarding 529 rollover contributions.
A good place to start