The 529 plan you choose can greatly impact your total savings when it’s time to pay for college. However, a family’s needs may change over time, and sometimes it makes sense to switch 529 plans.
Per IRS rules, you may rollover existing 529 plan funds into a new 529 plan once during any 12-month period. You can also keep an existing 529 plan account and direct new contributions to a new 529 plan account.
Here are some of the most common reasons a family might consider switching 529 plans.
1. You moved to another state
All 529 plans offer federal tax-deferred growth and tax-free withdrawals when funds are used to pay for qualified expenses. However, only certain states offer a state income tax deduction or credit for 529 plan contributions. Some states offer income tax benefits only when the family uses the 529 plan to pay for college. They may recapture any income tax benefits claimed if the funds are used to pay for K-12 tuition.
If you’re moving to a state offering these benefits, you could open a new 529 plan. You can direct any new contributions to the new 529 plan or do a full or partial rollover. Some states allow residents to claim a state income tax benefit for rollover contributions.
If the old state recaptures state income tax breaks for outbound rollovers, it may be best to keep the old 529 plan as is and open a new 529 plan in the new state.
2. You use your 529 plan to pay for K-12 tuition
The government established 529 plans to help families save for college expenses. Still, the Tax Cuts and Jobs Act of 2017 expanded 529 plan qualified expenses to include up to $10,000 in K-12 tuition (per year, per beneficiary).
Many age-based 529 plan portfolios automatically adjust allocations based on when the beneficiary will enter college. However, families using a 529 plan to pay for K-12 tuition have a shorter time horizon and less time to absorb investment risk. Having a separate 529 plan to save for K-12 tuition makes it easier for families to track their progress and maximize the value of their investments.
529 plans are beginning to offer 529 plan investments for K-12, such as Louisiana’s START K12 program and Kentucky’s enrollment-based 529 plan investment options, but most 529 plans are specifically designed to save for college. Families saving for K-12 tuition may consider a 529 plan offering target portfolios that do not automatically adjust.
3. Your children entered high school
With only four years left until college, you should adjust your savings strategy to align with the shorter time horizon. This can include:
- Reducing investment risk by moving some or all of your college savings into a state-sponsored prepaid tuition plan or Private College 529
- Switching to an in-state 529 plan that offers a state income tax benefit. In a short time period, the value of a state income tax benefit could be worth more than the benefit of using a 529 plan with lower fees. It can be like getting a discount on tuition.
- Rolling over one year’s worth of tuition from a grandparent-owned 529 plan to a parent-owned 529 plan each year after the FAFSA is filed to reduce the impact on need-based financial aid eligibility
4. You want to switch from an advisor-sold 529 plan to a direct-sold 529 plan
Families who originally purchased a 529 plan through a financial advisor can switch to a lower-cost direct-sold 529 plan. Financial advisors who sell 529 plans are compensated based on the 529 plan’s fee structure. In some cases, upfront sales charges can be as high as 5.75% of assets.
Some parents feel comfortable working with a financial advisor when selecting a 529 plan and allocating investments. However, many direct-sold plans offer age-based investment portfolios that automatically adjust based on the beneficiary’s age or enrollment date. Age-based 529 plan portfolios typically start in aggressive investments such as stocks and move toward more conservative fixed income investments over time.
5. Your 529 plan has high fees
In recent years, many 529 plans cut fees by offering lower-cost investment options such as index funds and exchange-traded funds (ETFs). There has also been competition among 529 plan providers to try to provide the lowest-cost 529 plan options. If your current 529 plan has not followed this trend, it might be time to look elsewhere.
6. You are unhappy with your 529 plan’s investment performance
529 plans are investment vehicles that go up or down in value based on the performance of the investment options and the overall stock and bond markets. Stock market returns are volatile and will fluctuate, and so will your 529 plan’s performance.
Past performance is not an indicator of future results, but keeping your funds in a 529 plan that consistently underperforms its benchmark may put your child’s college savings at risk. Risk-averse families may consider switching to a 529 plan with more conservative or FDIC-insured investment options.
Families can monitor their 529 plan’s performance by reviewing quarterly statements from the program manager and Savingforcollege.com’s quarterly 529 plan rankings.
