When should you switch 529 plans?

Joseph HurleyBy: Joseph Hurley | 
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Federal tax law allows you to roll over any or all of your 529 account from your current 529 plan to a different 529 plan, but only once in any 12-month period. (You can get around the 12-month restriction by naming a different family member as beneficiary of the 529 plan you are rolling into.) If you violate the 12-month rule, you must treat the transaction as a nonqualified distribution and pay federal tax and 10% penalty on accumulated earnings.

To transact a rollover, you can fill out the rollover contribution form available from the 529 plan you wish to move the money into. The administrator of your new 529 plan will then go about coordinating the transfer of funds directly from your old 529 plan. Alternatively, you can request a distribution from your old 529 plan, and within 60 days redeposit the amount of the distribution into a new 529 plan, informing the new plan that your contribution is a rollover and providing a breakdown between principal and earnings.

Rollovers do not routinely occur. Most 529 plan participants are satisfied with the plan they initially chose and see no reason to move the money to a different plan. In addition to the paperwork necessary to initiate a rollover, your plan may be one of the few that charges a fee to process a direct plan-to-plan rollover. What's even more costly is the 'recapture' tax you must pay with your state tax return if you originally deducted your contributions and reside in a state that requires recapture of the tax benefit upon the rollover of funds to another state's plan. (check your state's 529 rules)

There are several good reasons for some 529 plan participants to consider doing a rollover. Here are the most common.

RELATED: How much is each state's tax deduction really worth?

Joseph Hurley

Joseph Hurley

CPA, Founder
Joe Hurley launched Savingforcollege.com in 1999 while working as a tax CPA in Rochester, New York. He wrote and self-published the book 'The Best Way to Save for College--A Complete Guide to 529 Plans', now in its eleventh edition with over 100,000 copies sold. Through the years Joe and his wife Ginny opened accounts with 529 plans in 34 states for their two children, both of whom are now graduated from college. (The reason for so many different accounts was to facilitate research of 529 plans.) Joe now spends his full-time at Kettle Ridge Farm (maple syrup, honey, and shiitake mushrooms), though you may still see him occasionally at Savingforcollege.com.