Whether you’re looking for a college savings option with lower fees or exploring different investment options, it’s easy to transfer your existing college savings into a new 529 college savings plan.
You can roll over the assets of an existing 529 plan to a different 529 plan once every 12 months if the beneficiary is the same in both plans. If you are naming a different beneficiary, you can make the transfer at any time.
There are two types of 529-to-529 rollovers: direct and indirect.
With a direct rollover, you instruct the original plan’s trustee or custodian to transfer the account’s funds directly to the new trustee or custodian. If you change beneficiaries, the new beneficiary must be an eligible family member of the original beneficiary to qualify for tax-free transfer.
With an indirect rollover, you liquidate the original plan and withdraw the cash. You then have 60 days to deposit the funds in a new 529 plan in order to avoid taxes and penalties. As with direct rollovers, if you change beneficiaries, the new beneficiary must be an eligible family member of the original beneficiary to qualify for a tax-free transfer.
There may be state income tax consequences to a 529-to-529 rollover. If you received a state income tax deduction to enroll and invest in your state’s plan, you may have to pay back that deduction if you switch to another state’s plan. Check your plan for details.
Rolling over from a Coverdell Education Savings Account (CESA) works very similarly to a 529-to-529 indirect rollover. You will begin by liquidating the CESA. Once you receive the check, you will endorse it to the 529 college savings plan and mail it with an incoming rollover form to the 529 plan. If you’ve not yet opened the 529 plan account, you’ll need to include a 529 account application as well. Unless you include a statement from the CESA providing a principal versus earnings breakdown, the 529 plan may record your entire rollover as earnings. You will have 60 days to transfer the funds from your closed Coverdell account to avoid triggering state and federal taxes.
Consult your tax advisor regarding your specific situation, follow the transfer requirements and you should avoid any problems with nonqualified distributions and unexpected income taxes.