The quick answer is yes, 529 accounts can be rolled into new 529 college savings plan accounts. There are several rules that must be followed to avoid unwanted taxation and penalties, but they’re not particularly complicated and shouldn’t be an obstacle to shifting funds in this manner.
Why would somebody want to roll over funds to a new plan?
Before we get there, though, you may be asking why somebody would want to roll over a 529 account. There are a several reasons that make sense to me. These plans are not all created equal, and they change from time to time. It’s possible that a family initially chose a plan without realizing that it had high fees and/or poor investment choices. Upon learning that better options exist, they decided to make a change. In many cases, in fact, brokers sell plans that are not really the best option for the purchaser. They’re sold because they are a good option for the broker, even if it means that customers forego a state tax benefit because they’re buying a plan that is administered by another state.
Another basic reason that a rollover would make sense is that people move, and there may be new state tax benefits offered in their new home state. That is certainly worth investigating, in any case.
What should I be aware of?
As long as a 529 account has not been rolled over for the given beneficiary in the previous twelve months, there are no negative consequences to rolling it over. This is true even if the accounts have different owners. If the beneficiary has had an account rolled within the previous twelve months, it can still be done, but the beneficiary has to be changed. The beneficiary can then be changed back at a future date without no adverse consequences.
One key consideration
There may be state income tax consequences to rolling over a 529 account. Certain states may seek to recapture any state tax benefit that was previously received on contributions. Similarly, they may just treat it as a nonqualified distribution for state income tax purposes.
What if it’s done wrong?
The worst-case scenario if the process isn’t executed properly is that it will be considered a nonqualified distribution for federal taxes, which would also add a 10% tax penalty to all earnings in the account. There also could be gift tax considerations. The good news is that this shouldn’t be too hard. As with retirement account rollovers, doing a direct, trustee-to-trustee rollover is a good way to stay out of trouble.