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COLLEGE SAVINGS 101
No. 3 - Can you roll over from a 529 prepaid tuition plan to a 529 savings plan?
http://www.savingforcollege.com/articles/no-3---can-you-roll-over-from-a-529-prepaid-tuition-plan-to-a-529-savings-plan
Psoted: 2002-11-01
What are some of the things to watch if you rollover a prepaid plan to a college savings plan? - RD
Answer: Now why would you want to go and do that, RD? At many public colleges and universities, the tuition and fees are skyrocketing. Just this month the College Board came out with its annual report showing tuition and fees at the average 4-year public institutions to be 9.6% above last year's average prices, representing the largest jump since 1991. That figure is even more impressive when you consider that the general inflation rate was only 1.5%.
Most of the 17 state-run prepaid tuition plans are designed to protect families from this type of unpleasant surprise by footing the beneficiary's tuition bill at any in-state public institution no matter how high it is. Families with children enrolled in these programs are probably feeling pretty good about their investment right now. (If you are considering joining your state's prepaid program—assuming you live in a state that offers one—be sure to consider how the price of the tuition protection compares to current tuition levels. Some states have started charging a significant premium.)
Stock market woes have caused many accounts in 529 college savings plans to sink in value. But there may still be good reason for the owner of a prepaid tuition contract to consider transferring his or her investment to a college savings plan. For example:
- You expect a moderation of future increases in tuition and fees at public institutions in your state. After all, college costs can't keep going up by five times the rate of inflation forever.
- You expect investment returns in the college savings plans to improve in the future. After all, the stock market has to start going up again sometime.
- Some combination of the above.
- Your child is heading to a private college or out-of-state college and the prepaid tuition contract you hold doesn't convert at full value. (Check with your state, as it may not pose this problem.)
- You are afraid your prepaid tuition plan may sink under the weight of the tuition increases, and unless the state is legally obligated to back up the program's promises, your benefits could be reduced if the program becomes insolvent.
- You want to improve your child's eligibility for federal financial aid. Prepaid tuition plans reduce financial ""need"" on a dollar for dollar basis. Switching the money to a college savings plan, where only a fraction of the value is counted in determining eligibility, could produce a much better financial aid package.
The biggest potential drawback of switching from a 529 prepaid tuition plan to a savings plan is that your prepaid tuition plan may treat your decision to pull the money out of the plan and into another state's 529 savings plan as a ""cancellation"" of the contract. The fact that the move qualifies as a tax-free rollover for federal income tax purposes will provide little consolation. Cancellations are often subject to severe financial penalties, in some cases returning your original payments reduced by an administrative fee, and without any interest. If you were able to claim a state tax deduction for your payments into the plan, you may be required to pay state recapture tax.
Luckily, every state with a prepaid tuition plan now has a college savings plan too (or will have one soon). Most of these states provide a much better answer when the rollover is going from their prepaid plan into their own college savings plan. Be sure to consider this possibility before attempting to transfer your prepaid investment to another state's 529 plan.
What are some of the things to watch if you rollover a prepaid plan to a college savings plan? - RD
Answer: Now why would you want to go and do that, RD? At many public colleges and universities, the tuition and fees are skyrocketing. Just this month the College Board came out with its annual report showing tuition and fees at the average 4-year public institutions to be 9.6% above last year's average prices, representing the largest jump since 1991. That figure is even more impressive when you consider that the general inflation rate was only 1.5%.
Most of the 17 state-run prepaid tuition plans are designed to protect families from this type of unpleasant surprise by footing the beneficiary's tuition bill at any in-state public institution no matter how high it is. Families with children enrolled in these programs are probably feeling pretty good about their investment right now. (If you are considering joining your state's prepaid program—assuming you live in a state that offers one—be sure to consider how the price of the tuition protection compares to current tuition levels. Some states have started charging a significant premium.)
Stock market woes have caused many accounts in 529 college savings plans to sink in value. But there may still be good reason for the owner of a prepaid tuition contract to consider transferring his or her investment to a college savings plan. For example:
- You expect a moderation of future increases in tuition and fees at public institutions in your state. After all, college costs can't keep going up by five times the rate of inflation forever.
- You expect investment returns in the college savings plans to improve in the future. After all, the stock market has to start going up again sometime.
- Some combination of the above.
- Your child is heading to a private college or out-of-state college and the prepaid tuition contract you hold doesn't convert at full value. (Check with your state, as it may not pose this problem.)
- You are afraid your prepaid tuition plan may sink under the weight of the tuition increases, and unless the state is legally obligated to back up the program's promises, your benefits could be reduced if the program becomes insolvent.
- You want to improve your child's eligibility for federal financial aid. Prepaid tuition plans reduce financial ""need"" on a dollar for dollar basis. Switching the money to a college savings plan, where only a fraction of the value is counted in determining eligibility, could produce a much better financial aid package.
The biggest potential drawback of switching from a 529 prepaid tuition plan to a savings plan is that your prepaid tuition plan may treat your decision to pull the money out of the plan and into another state's 529 savings plan as a ""cancellation"" of the contract. The fact that the move qualifies as a tax-free rollover for federal income tax purposes will provide little consolation. Cancellations are often subject to severe financial penalties, in some cases returning your original payments reduced by an administrative fee, and without any interest. If you were able to claim a state tax deduction for your payments into the plan, you may be required to pay state recapture tax.
Luckily, every state with a prepaid tuition plan now has a college savings plan too (or will have one soon). Most of these states provide a much better answer when the rollover is going from their prepaid plan into their own college savings plan. Be sure to consider this possibility before attempting to transfer your prepaid investment to another state's 529 plan.
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Top 529 College Savings Plans
One-year rankings are based on a plan's average investment returns over the last 12 months.
State | Plan Name | |
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1 | Nevada | USAA 529 Education Savings Plan |
2 | Florida | Florida 529 Savings Plan |
3 | New Jersey | NJBEST 529 College Savings Plan |
Three-year rankings are based on a plan's average annual investment returns over the last three years.
State | Plan Name | |
---|---|---|
1 | South Dakota | CollegeAccess 529 (Direct-sold) |
2 | Wisconsin | Edvest 529 |
3 | Nevada | USAA 529 Education Savings Plan |
Five-year rankings are based on a plan's average annual investment returns over the last five years
State | Plan Name | |
---|---|---|
1 | Indiana | CollegeChoice 529 Direct Savings Plan |
2 | Florida | Florida 529 Savings Plan |
3 | Alaska | T. Rowe Price College Savings Plan |
10-year rankings are based on a plan's average annual investment returns over the last ten years.
State | Plan Name | |
---|---|---|
1 | West Virginia | SMART529 WV Direct College Savings Plan |
2 | South Carolina | Future Scholar 529 College Savings Plan (Direct-sold) |
3 | Ohio | Ohio's 529 Plan, CollegeAdvantage |