529 plan account transfers

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529 plan account transfers include the rollover of one 529 plan to another; the transfer of other college savings vehicles, such as Coverdell Education Accounts, series I/EE savings bonds, and Unified Gift to Minors custodial accounts to a 529 savings plan; as well as the transferring of beneficiaries and the ownership interest in the plan.

529 plan to 529 plan rollovers

There are any number of reasons you might want to transfer a 529 plan. You might wish to move the plan from a high cost plan to a low cost plan; you might move to a state that offers generous tax incentives for contributions to a 529 savings plan and you wish to consolidate your plan holdings in your new state's plan; you might want to exchange from your state's 529 prepaid plan to your state's 529 savings plan or vice-versa; or the beneficiary of your plan may decide not to pursue higher education and you would like to transfer the plan's assets to another beneficiary.

Members of the beneficiary's family.

The beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.

  1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
  2. Brother, sister, stepbrother, or stepsister.
  3. Father or mother or ancestor of either.
  4. Stepfather or stepmother.
  5. Son or daughter of a brother or sister.
  6. Brother or sister of father or mother.
  7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
  8. The spouse of any individual listed above.
  9. First cousin.
-- IRS Publication 970


You are allowed to rollover one 529 plan into another 529 plan. If a rollover conforms to the following conditions you will pay no tax on the transfer:

  1. You are allowed only one rollover to another 529 plan per twelve month period for the same beneficiary.
  2. You are allowed to rollover a 529 plan to a family member of the beneficiary. There is no restriction on the number of times this can occur per twelve month period.
  3. The rollover must occur within 60 days of the distribution for the distribution to not be considered a taxable distribution.
  4. You are also allowed to change the beneficiary of a 529 plan as long as the new beneficiary is a member of the family of the old beneficiary. There is no restriction on the number of times this can occur per twelve month period. [1]

More and more 529 savings plans are accommodating direct plan to plan transfers, without liquidating the plan and sending you a check. While this direct transfer exchange mirrors the trustee-to-trustee exchange of retirement plans, the 529 plans strictly reside in the rollover world. In order to avoid a taxable distribution you must finalize the transfer transaction within 60 days, and you must abide by the rollover limitations listed above. Also keep in mind that some states impose a recapture tax on past tax deductions for out of state rollovers.

Transfers for I/EE bonds and Coverdell ESAs into 529 savings plans

If the 529 plan accepts them, redeeming I/EE savings bonds or taking distribution of a Coverdell Education Savings Account and contributing the proceeds to a 529 plan is considered a qualified educational expense. In order to qualify for a tax-free transfer, both the redemption of funds and the rollover to the 529 plan must take place within the same calendar year.

I/EE savings bond transfers

If you meet all of the conditions for qualifying for the savings bond qualified education expense exclusion, you can roll the qualified redemption proceeds into a 529 savings plan.The savings bond educational interest exclusion is filed on IRS Form 8815. Write "529 College Savings Plan" in the answer to 1(b), where it asks for the name of the educational institution. [2]. The 529 plan will require you to provide a breakdown of principle and interest of the bonds when you make the transfer. For savings bonds, this can be accomplished by sending the plan a copy of Form 8815 or a copy of the 1099-INT form you will have received from the institution that redeemed the bonds. Supplying this information to the 529 plan is critical. If the plan does not receive this breakdown between principle and interest, it will account the transfer as consisting entirely of earnings which are subject to income tax and a 10% additional tax if withdrawn as a non-qualifying withdrawal from the 529 plan. Principle is not taxed in a 529 plan withdrawal.

Coverdell ESA transfer

To make a transfer of a Coverdell ESA to a 529 savings plan you would follow these steps:

  1. Request a withdrawal from the Coverdell ESA
  2. Contribute funds to a 529 plan for the same beneficiary.
  3. Treat the Coverdell withdrawal as a tax-free "qualified distribution" on the beneficiary's income tax return.

When you take a distribution from a Coverdell ESA you will receive a Form 1009-Q (2008). For transfers from a Coverdell Education Savings Account, provide the 529 plan with an account statement issued by the financial institution that acted as trustee or custodian showing contributions and earnings (or losses) in the account.[3] Supplying this information to the 529 plan is critical. If the plan does not receive this breakdown between basis and gain/(loss), it will account the transfer as consisting entirely of earnings which are subject to income tax and a 10% additional tax if withdrawn as a non-qualifying withdrawal from the 529 plan. Principle is not taxed in a 529 plan withdrawal.

Uniform Gifts to Minors (UGMA) or Uniform Transfers to Minors Act (UTMA) transfer to a 529 plan

"Uniform Gift to Minors Act (UGMA)

An act that allows minors to own property such as securities. The IRS allows persons to give so many thousands of dollars to another person without any tax consequences. If this recipient person is a minor, the UGMA allows the minor to own the assets without an attorney setting up a special trust fund. Under the UGMA, the ownership of the funds works like it does with any other trust except that the donor must appoint a custodian (the trustee) to look after the account. The donor can appoint him/herself or another person to be custodian. The custodian, who has a fiduciary duty to manage the minor's assets wisely, can use the funds to buy securities on behalf of the minor. Access to the gift must be given to the minor when he or she reaches the age of majority, either 18 or 21 (sometimes even 25), depending on UGMA state law. Should a donor acting as the custodian die before the custodial property is transferred to the minor, the entire custodial property is included in the donor's taxable estate.

Uniform Transfers to Minors Act (UTMA)

An extension of the Uniform Gifts to Minors Act that allows items other than cash or securities to be considered gifts. Other gifts that minors can receive include real estate, art, patents and royalties."

-- Investopedia (UGMA)

-- Investopedia (UTMA)


Not all states allow the transfer of Uniform Gifts to Minors (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts to a 529 Plan. (See side quote box for a definition of these custodial accounts designed for holding a minor's assets). But for those that accept them, the IRS deems such a transfer a qualified educational expense. Due to the restrictive characteristics of a UGMA/UTMA, you can not transfer this account into a typical 529 savings plan. The transfer must be to a custodial 529 savings plan. Each state has its distinctive requirements for UGMA accounts, but the following essential restrictions apply to custodial 529 plans. You must refer to your state's custodial 529 plan for specific requirements:

  1. The beneficiary cannot be changed (directly or by means of a rollover) except as permitted by UGMA/UTMA.
  2. The custodian should not change the Account Owner to anyone other than a successor custodian.
  3. The beneficiary of the custodial 529 plan must be the beneficiary's estate.
  4. Upon the beneficiary reaching majority (commonly age 18 or 21), the custodianship of the plan terminates and the beneficiary becomes the account owner.

Common reasons for transferring UGMA/UMTA custodial accounts to a custodial 529 savings plan are:

  • Tax Savings: If the UGMA/UMTA custodial account is primarily intended for meeting college expenses, a transfer to a custodial 529 savings plan will allow tax free distribution of the account for qualified education expenses.
  • Financial Aid: If the beneficiary is your dependent, a custodial 529 plan is considered a parental asset for financial aid purposes. UGMA/UTMA custodial accounts are considered student assets. Parental assets are subject to a maximum 5.64% valuation assessment in federal needs analysis; student assets are assessed at a flat 20% rate. [4]
  • Control Issues: A custodial 529 savings plan can exert greater fiduciary control over the minor's assets than can a standard 529 savings plan.

Caveats for for transferring UGMA/UMTA custodial accounts to a custodial 529 savings plan include the following:

  • A custodial 529 plan can only accept cash deposits. This means that UGMA/UTMA custodial assets may have to liquidated and taxed to make the transfer. UGMA/UTMA custodial assets are taxed to the child (In 2009 the first $900 of a dependent child's -below the age of 19, or 24 if a full-time student- investment income is tax-free, and the next $900 is taxed at the child's rate, which is typically 10%). The overall tax savings for a transfer may not be compelling. In addition, with a transfer to a custodial 529 plan, any non-qualifying asset withdrawals will be subject to income tax and the 10% additional tax. Withdrawals for any purpose from a UGMA/UTMA account would likely be subject to capital gains taxes. Vanguard provides a UGMA/UTMA to a UGMA/UTMA 529 Calculator which can help quantify a potential transfer. A transfer is also less compelling if applying for financial aid or exercising control issues are low priorities for the college saver.

A transfer of UGMA/UTMA custodial accounts to a custodial 529 plan is a decision that warrants assistance from a qualified professional CPA.

Transferring beneficial and owner interests

Helpful links

The following sites provide articles, Q and A, and other resources on the specifics of managing and transferring 529 plans:

  1. Savingforcollege.com Articles and Archives
  2. Morningstar Advisor:College Savings

The following paper examines gifting issues confronting grandparents:


Beneficiary changes

You may wish to change the beneficiary for any number of reasons (death of the beneficiary; a beneficiary's decision to forgo higher education; or a residual of plan assets after paying qualified education costs for the beneficiary). Rather than withdraw the plan assets and incur income tax on the plan's earnings and a 10% additional tax on non qualified withdrawals, it is often preferable to transfer a 529 plan to another qualifying beneficiary.

The key factor involving the changing of a 529 beneficiary is that all changes must be to a member of the beneficiary's family tree (see the sidebox, Members of the beneficiary's family). As long as any change occurs "laterally" to beneficiaries one step below your generation, or "upwards" to an older generation, the IRS is indifferent to the transfer. [5]


Imbox notice.png Example: lateral changes
You have established 529 savings accounts for your son Robert and daughter Nicole. Robert decides not to attend an institution of higher learning. You then transfer the funds in Robert's 529 plan to Nicole's 529 plan. Later, when Nicole has finished her schooling, there remains a balance in the 529 plan. You now shift the beneficial interest over to Miriam, your sister's daughter (your niece and Nicole's cousin). All of these transfers occur within the generation one step below your generation.

Example: vertical (upward) changes

When your daughter Nicole has finished her schooling you shift the beneficial interest of the 529 plan to Mary, Nicole's mother, who is interested in pursuing post-graduate work. This transfer is upwards, since it moves the beneficiary from the child's generation to the mother's generation.


The IRS takes an interest in a transfer whenever the transfer involves a shift two steps down from your generation, and "skips" a generation. This skip subjects the account owner (or beneficiary) to the generation-skipping transfer tax‎. This skip is especially pertinent to grandparent's setting up, or shifting beneficial 529 interests to grandchildren. Fortunately, the same tax exclusions applying to the basic gift tax also pertain to the generation skipping transfer tax. One is allowed an annual $14,000 ($28,000 if there is a spousal "split") exclusion to the generation skipping transfer tax. One can also exclude up to $65,000 ($130,000 if there is a spousal "split') by electing five year forwarding of the transferred interest. Any transfer that involves a skip would benefit from the counsel of a qualified CPA.

Ownership changes

Each of the three largest mutual fund firms managing 529 plans labels the successor owner/donor differently on their account registrations:
  • TIAA-CREF refers to the successor as the Contingent Account Owner;
  • Fidelity refers to the successor as the Successor Participant (Account Owner);
  • Vanguard refers to the successor as the Successor Account Owner.


A 529 plan can only have one owner (also sometimes called donor). Thus, it is very important for 529 plan holders to name a successor owner to take over the ownership rights of the plan in case of the original owner's death. Failure to name a successor will force succession to be determined by will or state intestacy laws. In the case of parental 529 plan owners, the most common successor would be the owner's spouse.

Grandparents may face a more complex decision with account succession. Grandparents ordinarily set up and donate to a 529 savings plan for young grandchildren and great grandchildren (if the younger generations are in or approaching their college years, the grandparents could simply gift immediate payment of educational costs). A grandparent ordinarily will choose a successor owner from a younger generation (usually their child as parent of the grandchild.) This designation can work fine if the grandparent trusts the parent and in law spouse to follow their intentions over time. However in the case of blended families, or in the instance of divorce, the grandparent's charitable wishes can be violated. This is due to the fact the the successor owner has control over the account, having the power to change beneficiaries, or even cash out the account. If such issues of control are important to a grandparent it is essential that one use a qualified estate planner to devise workable solutions.

Most 529 plans will allow a plan owner to transfer a 529 plan to a new owner, such as one's spouse, child, or grandchild, without restriction (although the IRS has indicated that it is going to issue proposed regulations to stop abusive practices). [6] However, a number of state plans (see table below) do restrict ownership transfers. If one wishes to transfer ownership of a 529 plan from a restrictive state, one should first transfer the 529 plan to a state plan that allows ownership transfers, and then execute the transfer. Currently, New York is the only state placing restrictions on ownership changes that also imposes a recapture tax on past tax deductions for out of state rollovers.


529 savings plans with restrictions on account ownership changes [7]
529 Savings Plan Ownership Transfer Restriction
Arizona Accepts requests to change account ownership. However, the program may report an owner change as a nonqualified distribution subject to all applicable federal and state taxes and penalties.
Delaware Account ownership may not be transferred prior to the owner's death or incapacity.
Louisiana Account ownership may not be transferred prior to the owner's death or incapacity.
Massachusetts Account ownership may not be transferred prior to the owner's death or incapacity.
New Hampshire Account ownership may not be transferred prior to the owner's death or incapacity.
New York Account ownership may not be transferred prior to the owner's death without a court order.
Tennessee No provision for permitting an account owner change.

References

  1. Section 529 Plans, FinAid
  2. FinAid Section 529 Plans
  3. Virginia 529 Plan document
  4. Section 529 Plans, FinAid
  5. IRS: 529 Plans: Questions and Answers
  6. Guidance on Qualified Tuition Programs Under Section 529, Internal Revenue Bulletin: 2008-9, March 3, 2008 , Announcement 2008-17
  7. Compare by Features, Savingforcollege.com

External links

Sites

Articles