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A recent call with a financial advisor in New Jersey is representative of a common question on 529 Plans.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business.
“I have a client with quite a few different 529 plans for the same beneficiary. For example, he has one with the state of New York and one with Massachusetts and one in New Jersey as well as a couple of others. Can he roll them all over into the New Jersey 529 Plan to consolidate the accounts into one, or does a 60-day rollover rule prevent him from doing these rollovers all this year?”
529 plans are subject to the 60-day rollover rule. Consequently, direct or indirect rollovers between 529 plans for the benefit of the same beneficiary can occur only once every 12 months.
A 529 plan, also referred to as a Qualified Tuition Program (QTP), is operated by a state or educational institution to make it easier to save for college and other post-secondary training, or for tuition to attend an elementary or secondary public, private, or religious school for a designated beneficiary, such as a child or grandchild.
Contributions to a 529 plan are not deductible on federal taxes, but some states give tax breaks on contributions made to the plans. Earnings are not subject to federal tax and, generally, not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board at an eligible education institution.
The purchaser of the 529 plan is the account owner or custodian and controls the funds until they are withdrawn. The designated beneficiary is the person who benefits from a 529 plan.
IRC Sec. 529(c)(3)(C) allows for changes in beneficiaries or programs as follows:
A distribution from a 529 plan is not taxable if it is transferred within 60 days of the distribution to:
A 529 plan for the benefit of the same beneficiary, or
A 529 plan for the benefit of a member of the beneficiary's family (some examples include a sibling, stepbrother, half-sister, parent, child, spouse, and cousin), or
Before 1/1/2026, to an ABLE account for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family (including the beneficiary’s spouse). But the amount distributed when added to other amounts contributed to the ABLE account cannot exceed the annual contribution limit.
In addition, the custodian can simply change the beneficiary to a member of the beneficiary’s family anytime. A distribution is not required.
However, if the rollover method is used to combine 529 plans, IRC Sec. 529(c)(3)(C)(iii) does not allow another 60-day transfer to occur until 12 months from the date of a previous transfer to any other 529 for the benefit of the same designated beneficiary.
Direct or indirect rollovers between 529 plans for the benefit of the same beneficiary can occur only once every 12 months. In this case, they will have to combine these 529 accounts for this beneficiary over the next few years.