529 plans are a great way to save for future college costs and there are many plans available in all fifty states. You can avoid getting a personal loan to send your kids to college by being proactive and opening a 529 account for your child when they’re still young so you can save for his college education.529 plans are also free of federal tax so these provide great tax breaks.
These plans have no income limitations and age restrictions so this makes it even more attractive. If you already have a plan, there may be a time when you need to transfer the plan. If you’re holding the account for a beneficiary and the beneficiary decides to not pursue a college education so you need to transfer the plan to another beneficiary. Or, you might also want to move to a state that provides better tax incentives for 529 plan contributions. Whatever your reason for transferring your 529 plan, there are rules that will apply to this process.
Changing a 529 Plan’s Beneficiary
You can change the beneficiary of a 529 plan without a tax penalty as long as the new beneficiary is a member of the family. Valid family members include the beneficiary’s descendants, siblings, parents and first cousin. The tax rules may get complicated if you have a special situation like when generations are skipped so you might want to consult a tax advisor.
Another reason to change a 529 plan’s beneficiary is if the original beneficiary decides not to pursue higher education. In this case, you can choose to keep the money where it is in the chance that the original beneficiary decides to go to college later on. You can also change the beneficiary following the valid family members’ rule above. A third option for you in this case is to withdraw money on the account. A tax penalty may be assessed on the earnings portion of the withdrawal but certain conditions may help you avoid the penalty. These conditions include if the beneficiary dies or becomes disable or if the beneficiary receives a scholarship.
Moving Money from One 529 Plan to Another 529 Plan Under the Same Beneficiary
You can generally rollover a 529 account to another account under the same beneficiary without a tax penalty if it is within a 12-month period. To avoid a tax penalty, the rollover must also occur within 60 days of the distribution so that it will not be considered a taxable distribution. You need to check with your current plan if it accepts a request for a rollover and also check the fees that go with it.
Rollovers from an UGMA/UTMA Account or Coverdell Education Savings Account into a 529 Plan
529 Plan rollovers from other college savings accounts also have their own rules. UGMA/UTMA stands for Uniform Gifts/Transfers to Minors Account. You can use the money from these accounts to open a 529 account. Generally, the liquidation of assets under the UGMA/UTMA account is taxable. Contact your tax advisor before undertaking this process as there may be tax implications for this.
To avoid a tax consequence when moving money from a Coverdell Education Savings Account (ESA) to open a 529 plan, you need to complete the process within the same calendar year.
Before you rollover from an UGMA/UTMA account or Coverdell ESA, make sure that you’ve weighed the advantages and disadvantages between these college savings account types. These may have different effects on your eligibility for financial aid and undertaking the move from one account to another may have tax consequences so it’s best to consult your tax advisor.
What to Ask Before Picking A 529 Plan
Since there are many 529 plans available throughout the U.S., There are a few things to ask about a 529 Plan before you decide to rollover your old UGMA/UTMA accounts or Coverdell ESA account to one.
Here are a few guide questions:
- Is this 529 plan offered by the state or a plan sponsor?
- What are the withdrawal restrictions of the 529 plan?
- What college expenses does the plan cover?
- Does my child’s dream college or university participate in the plan?
- As a state resident, do I get special benefits?
- Am I better off investing in the 529 plan offered by another state?
- How expensive is this plan and can I afford it?
- What investment options does the plan provide?
- Prior to being invested, how long are the contributions held?
- How was the past performance of the program manager?
Answering these questions will help you make a good decision on which 529 plan to invest in. Once you’ve made your decision on the best 529 plan to invest in. Your next task is to make sure to make regular contributions to the plan.
Making regular contributions to your plan makes you that much closer to seeing your child graduate. Don’t forget to build your retirement plan along with your 529 plan as making sure that your child finishes college should not be your only financial goal.
Getting a 529 plan or another college savings account should be part of your overall wealth strategy and these should include investments and making sure that you are properly covered by insurance. Saving money through a college savings account like a 529 plan is a much better option than asking your child to take out a student loan to get a college education.