Virtue #1 What’s the 411 on 529s?

I was asked about moving 529s the other day and I wanted to address that here.

What is the 529? has a wealth of information on this topic, but specifically describes it as

an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996.

• Nationwide college-saving vehicle offered through states but maintained by outside investment companies
• Contributions –
o no federal tax deduction
o may offer full or partial state tax deduction or credit
o Automatic contribution option through linked bank account or payroll deduction plan
• Earnings growth – tax free
• Withdrawals –
o Qualified – tax free when for college expenses – room, board, tuition, books
o Non-qualified – incurs income tax and 10% penalty tax
• Donor control
• Max contribution $14000 per individual per year (annual gift tax exclusion)
• Investment choice changes twice per calendar year
• Rollover into another 529 one time within a 12-month period
• No income limits, age limits or annual contribution limits
• Lifetime contribution limits vary by plan range from $235,000 – $500,000

Types of 529s
There are two types of 529 plans: prepaid and savings plans. Prepaid plans allow you to prepay for private colleges and savings plans are plans with contributions that are invested in mutual funds or exchange traded funds.

Rollover options
You are allowed to rollover any or all of your 529 account from your current plan to a different plan only once in a 12-month period, therefore avoiding the transaction being treated as a non-qualified distribution, and paying federal tax and a 10% penalty on earnings. Keep in mind that if your child does not choose to go to college you may change the beneficiary of the plan to another one of your children or you may use the funds for your own college expenses.

To Begin the Process
1. Do YOUR research
2. Open a new 529 plan
3. Complete the rollover contribution form available from the plan you wish to move your money into and the plan administrator of your new plan will coordinate the transfer of funds directly from your old 529 plan
4. Request a distribution from your old 529 plan, and within 60 days redeposit the amount into the new 529 plan, notify the new plan that the contribution is a rollover, and provide a breakdown between principal and earnings to the administrator
Most 529 plan participants stay with their plan, so rollovers do not occur often; and in addition to the paperwork the administrator may charge a fee to process the rollover. Recapture tax is another disadvantage that you may occur if your originally took a deduction and reside in a state that requires recapture of that benefit upon the rollover of funds to another state’s plan.

When to Switch?
• Lower cost plan with higher net returns
• In-state tax deduction on contributions if rollover treated as a contribution
• Manager, investment option change or termination of plan
• Continued poor performance
• Better service expectations
• Plan too restrictive – owner change difficulty
Switching can be done either with a financial advisor’s help or online.

529s are one of many ways that moms and extended family can support their loved little ones if college is an option that they want to pursue. We will address part 2 of 529s, other college funding resources, and gifting options in the weeks to come.