Beginning in 2024, people who invest in 529 plans can take advantage of tax savings by changing their beneficiary to include parents, spouses, siblings, step-siblings, children, nieces, nephews or first cousins as beneficiaries.
Note, however, that rollovers are only permitted once every 12 months per beneficiary and no more than one can be completed within any 12-month period.
Rollover of 529 accounts typically involves opening new accounts with different custodians. This can incur significant fees – particularly if the new plan requires higher investment fees or minimum investments – while switching accounts could also cause accidental market timing, potentially degrading long-term performance of investments.
Consider rolling over if your current state offers tax benefits on contributions to 529 plans, or you are paying service fees on multiple accounts and want to consolidate them into one account. Just make sure there aren’t any clawback rules in your previous state if moving elsewhere – or it can become quite costly indeed!
Starting in 2024, funds saved within 529 plans may be eligible to be rolled over into their beneficiary’s Roth IRA without incurring income taxes or the 10% nonqualified withdrawal penalty – an initiative designed to benefit grandparents using 529s to save for college education expenses for their grandchildren.
Transferring money from one 529 plan to another without incurring taxes or penalties is possible without incurring taxes or penalties, though you should carefully consider any potential consequences of doing so before moving forward. One option would be changing the beneficiary of the account to someone other than yourself (i.e. spouse or first cousin), which can help avoid potential penalties of non-qualified withdrawals (up to 10% of earnings).
Converting 529 assets to Roth IRAs may also be an option, which could prove particularly advantageous if your beneficiary is considering graduate studies like law or business school. Converting will reduce taxable estate sizes as well as taking advantage of tax credits or deductions available for education-related expenses; however, this strategy can be complicated since only one tax-free rollover per beneficiary per 12 month period is allowed; coordination must occur to ensure no more than one rollover occurs simultaneously.
As with a rollover, changing the beneficiary of your 529 account without incurring tax consequences is possible, provided the new beneficiary falls within an eligible family unit (i.e. siblings, step-siblings, parents, grandparents, aunts and uncles).
However, before changing the beneficiary of your 529 plan, please seek advice from an accountant or financial advisor as some states have regulations that require you to repay any previous tax deductions on funds that have been transferred.
Notably, beneficiaries must be family members only and funds may only be rolled over once every 12 months. That said, new laws that will take effect in 2024 could make these accounts even more appealing to savers; these allow account balances to be transferred into Roth IRAs with contribution limits and age requirements; this could be especially helpful for grandparents and others saving for college education but unsure whether their child will go.
Transferring between states
Many states allow account owners to transfer from one 529 plan to another (known as trustee-to-trustee rollover) without incurring penalties once every 12 months, making this option useful if your 529 plan has high fees or your beneficiary has changed their education goals and no longer fits within its original plan.
Change the Beneficiary at Any Time It is also possible to switch beneficiaries of a 529 plan whenever necessary without incurring a fee and tax or penalty, provided the new beneficiary meets family definition criteria – this could include spouses, siblings, children, parents, step-children, first cousins or in-laws as possible changes.
You can also take this approach if you are moving to another state that provides tax deductions on contributions to 529 plans, but beware: some states may require you to repay any deductions you’ve already taken when withdrawing funds.