Federal tax law allows one tax-free rollover of any or all of your 529 accounts from your current 529 plan to a different 529 plan once in any 12-month period. You may get around the 12-month restriction by naming a different family member as the plan beneficiary of the 529 plan you are rolling into.
529 college savings plans are excellent tax-advantaged accounts for higher education, but there may come a time when switching plans makes sense. Knowing when and how to switch can provide significant advantages, Whether for lower fees, better performance, or improved customer service.
You want the lowest-cost 529 plan
Perhaps when you opened your 529 account, it was with the lowest-cost 529 plan. But competition being what it is, many 529 plans have aggressively reduced their fees and expenses, and your plan may no longer be the lowest cost.
It doesn’t make sense to jump to a lower-cost 529 plan unless you can expect higher net returns. That can be a reasonable expectation if, for example, the underlying investments in your current 529 plan consist of index funds, and you can find similar index funds in another 529 plan account at a lower cost.
You want to claim an in-state tax deduction
Let’s say you open a 529 account with an out-of-state 529 plan, either because your home state’s plan did not offer a state income tax deduction for contributions or because the deduction offered by your home state wasn’t enough to overcome deficiencies in cost, performance, or investment choices. If your state now has one, taking advantage of a state income tax deduction may not be too late, provided it treats rollover contributions like regular contributions.
Remember: Some states do not count rollover contributions eligible for a state income tax deduction.
Your 529 plan manager changes
If your plan changes managers or investment options, you might want to switch to a different 529 plan that better aligns with your goals. A new manager may change how your money is invested, which could impact your plan’s performance.
States generally bid out the contracts to manage their 529 savings programs, and every so often, a state will rebid the contract and end up switching managers to a new investment firm. Although there is usually every reason to believe the change benefits plan participants, you don’t necessarily have to agree. You may decide to look elsewhere once the change in managers is announced.
Even with no change in manager, a change in the menu of investment options or the underlying funds used can be implemented without your agreement. And if your state ever decides to terminate its 529 plan, with Wyoming being an example, you’ll be forced to roll over to another state’s 529 plans if you want to avoid tax and IRS tax penalties.
You expect poor performance to continue
As every investor should know, past performance does not guarantee future returns. However, suppose your 529 plan has not demonstrated good performance, as measured against its performance benchmarks or competing 529 plans. In that case, you may think switching to a different 529 plan with better-quality investments is best.
Most 529 savings plans make their performance figures available quarterly, monthly, or even daily on their websites. Saving For College tracks and ranks 529 performance ratings to make it even easier to view and compare plan performance.
Investment professionals with a premium subscription can view performance for thousands of 529 portfolios and plan performance comparisons and rankings for advisor-sold plans.
You experience poor customer service
You may have questions about setting up your 529 account, making changes, taking withdrawals, or even just understanding the quarterly statements and other information you receive online or through the mail. You can usually obtain help through the plan’s toll-free telephone number.
Many plans allow you to handle your needs online with no delay. If you experience difficulties or frustration with your 529 plan, you will be tempted to move your account elsewhere to receive better services.
Your current plan is too restrictive
When you signed up for your 529 plan, there may have been one or more restrictions in the plan that were not required under federal tax law. Although the restriction did not appear particularly troublesome then, you may now find yourself bumping up against it.
One example is a grandparent who sets up the 529 account and later decides the grandchild’s parent better manages the account. If the 529 plan is one of the handful of plans that does not allow an account owner change before the original owner’s death or legal incapacity, the only way to get around this restriction is to roll over the account to a new 529 plan that accepts requests for owner changes.
How to switch 529 plans
Once you’ve decided to make the switch, follow the steps in our article here on how to switch 529 plans. Be careful to complete this process properly to avoid a nonqualified withdrawal that can result in tax consequences. The basic steps are:
- Select a new 529 plan. Research and choose a new plan to roll over your 529 plan. You can see our list of the best 529 plans here.
- Open your new account. Open your new 529 plan with your selected provider.
- Roll over your 529 funds. Submit a 529 plan rollover request to your old and new 529 plan administrators via a rollover form or other method they require.
Remember that switching plans may involve certain administrative or transfer fees or require you to sell investments, which could temporarily dip your account balance. Additionally, some states may not treat rollover contributions the same as new contributions for tax benefits, so you may be limited on the upside of switching 529 plans.