A 529 plan is an education savings plan designed to allow families to set aside funds for college costs. The investment in the plan will grow tax-deferred and distributions from these plans will be tax-free as long as they are used to pay for the designated beneficiary’s qualified college expenses. However, 529 plans aren’t very flexible when it comes to changing to another 529 plan or changing the investment strategies within the 529 plan itself.
Guidelines and Limitations
529 plans are designed to be a hands off investment and Internal Revenue Code mandates that to be the case. If you want to change your 529 plan, care needs to be taken with the timing of the transfer. Only one rollover to another qualified tuition program is allowed within a 12 month period. When more than one transfer occurs within a 12 month period, the transfer will be deemed to be a taxable distribution from the 529 plan and the earnings on your 529 plan will be subject to income taxes and penalties, as the funds were not used for a qualifying expense.
The IRS also limits the number of investment strategy changes that can be made in a 529 plan to one per calendar year. When more than one investment strategy change is made in a calendar year, you will be deemed to have made a taxable distribution from your 529 plan. This will cause the earnings on your 529 plan to be subject to taxes and penalties. A change in the designated beneficiary of the 529 plan to another qualified family member at the same time you are making the rollover or investment strategy change that would trigger tax, will not subject the investment strategy change to tax or penalty.
Beware of Penalties
Performing these acts without the proper guidance could cause the earnings in your 529 plan to be subject to taxes and penalties. So before performing a rollover or investment strategy change for your 529 plan, make sure you consult your DGC team member.