529 plan - investment change limitation

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nps
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529 plan - investment change limitation

Post by nps »

IRS regulations only allow you to exchange money from your current 529 investment options to a different option twice per calendar year. Does anyone know or have a source as to whether this limitation applies to a single state's plan, or across all states' plans? I know some on here, including me, maintain plans in more than one state.
informal guide
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Re: 529 plan - investment change limitation

Post by informal guide »

I don't believe the regulations ever envisioned an investor holding multiple states' 529 plans.

Also, from a practical standpoint, there is no tracking mechanism of exchanges across multiple states' plans, whereas individual plans have the investment change regulations built into the recordkeeping systems.

In any event, some Bogleheads might ask why one would need to do more than two investment changes in a year.

Having said all this, I don't have a source handy for any of these comments.
rkhusky
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Re: 529 plan - investment change limitation

Post by rkhusky »

nps wrote: Sat Aug 31, 2019 8:30 am IRS regulations only allow you to exchange money from your current 529 investment options to a different option twice per calendar year. Does anyone know or have a source as to whether this limitation applies to a single state's plan, or across all states' plans? I know some on here, including me, maintain plans in more than one state.
The restriction seems to be per account, according to the below IRS notice, but the statutory language uses the term "program". So, one state's plan should not affect another state's plan, but I'm not sure about different accounts within the same state with the same contributor or beneficiary.

Interesting that the original statute appeared to not allow any changes.
Section 529(b)(4) states that a program shall not be treated as a section 529 qualified tuition program unless it provides that any contributor to, or designated beneficiary under, such program may not directly or indirectly direct the investment of any contributions to the program (or any earnings thereon). The proposed regulations under section 529, which were published in the Federal Register on August 24, 1998 (REG-106177-97, 1998-2 C.B. 344 [63 F.R. 45019]), provide that a program does not violate this requirement if it permits a person who establishes a section 529 account to select among different investment strategies designed exclusively by the program, only at the time when the initial contribution is made establishing the account. Prop. Treas. Reg. §1.529-2(g).
See:
https://www.savingforcollege.com/articl ... hanges-689
https://www.irs.gov/irb/2009-02_IRB#NOT-2009-1
https://www.law.cornell.edu/uscode/text/26/529
BuddyJet
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Re: 529 plan - investment change limitation

Post by BuddyJet »

Another thing to consider is that the investment change limitation only applies to reinvestment/rebalance of the entire account balance but new money can be invested differently without triggering the limitation.

For example, if the account is 50% fund A and 50% B, new money can be invested in C without triggering the limit. If the values have changed so that the AA between A and B is off, new money can go 100% to A if that side is light.
People say nothing is impossible. I do nothing all day.
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nps
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Re: 529 plan - investment change limitation

Post by nps »

Thanks all. I'm in a state with a tax deduction for contributions but higher fees. Also no recapture provision for rollovers out. To mitigate the impact of liquidating and having the funds out of the market for however long it takes to transfer, I am considering exchanging the stock fund to money market first and simultaneously exchanging bonds for stocks in a retirement account to offset. Then doing the reverse actions once the 529 funds reach the new account. That's only two investment changes and in different accounts, but if they both counted against the limit it wouldn't leave any additional flexibility to change allocations that year.
BuddyJet
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Re: 529 plan - investment change limitation

Post by BuddyJet »

The change limit is per calendar year so in January the count resets.
People say nothing is impossible. I do nothing all day.
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