529 plan account transfers

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.

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:
 * You are allowed only one rollover to another 529 plan per twelve month period for the same beneficiary.
 * 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.
 * The rollover must occur within 60 days of the distribution for the distribution to not be considered a taxable distribution.
 * 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.

More and more 529 savings plans are accommodating direct plan to plan transfers, without liquidating the plan and sending you a check. While the direct transfer exchange mirrors the trustee-to-trustee exchange of retirement plans, the 529 plans strictly reside in the rollover world. You must finalize the transaction within 60 days; and you must abide by any of the rollover limitations listed above.

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


 * Request a withdrawal from the Coverdell ESA.
 * Contribute funds to a 529 plan for the same beneficiary.
 * 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. 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
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:


 * The beneficiary cannot be changed (directly or by means of a rollover) except as permitted by UGMA/UTMA.
 * The custodian should not change the Account Owner to anyone other than a successor custodian.
 * The beneficiary of the custodial 529 plan must be the beneficiary's estate.
 * 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.
 *  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 from a less restrictive 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.

Links

 * College Savings Plan Network
 * College Board
 * FinAid Section 529 Plans
 * Information for Financial Aid Professionals (IFAP) Library
 * Custodial Accounts for Minors :Transfers to Section 529 Plans, Kaye A. Thomas Fairmark.com
 * Morningstar Advisor:College Savings