A 529 is a tax-advantaged savings plan intended to help cover the costs of education. These flexible savings plans are designed to accommodate the account changes that you may need to make over the years. Here, we explore how to change your 529 plan ownership, including updating the account owner, beneficiary, your investment options and your monthly contributions.
Changing the Account Owner
Most states allow changing ownership of a 529 plan and there are generally no requirements about the relationship between the former and the new owner of a 529 plan. However, many states, only allow you to change ownership of a 529 plan when the original account owner dies or in special circumstances, such as divorce.
If changing ownership of a 529 plan makes sense for you, you can change the account owner, or roll over the account, tax-free, one time during a 12-month window. If you change ownership of the account more than one time in a 12-month period, the transaction would be considered a nonqualified distribution and would require you to pay a penalty, as well as federal income tax.
Changing the Beneficiary
Changing the beneficiary of your 529 account is simple: The account owner fills out a change of beneficiary form and submits it to his or her 529 plan administrator. Depending on your plan, you may have to pay an administrative fee.
But what if the original beneficiary needs some of the funds in their 529 account? The good news is you can split a 529 account by creating a new account for an additional owner and rolling over some funds from the old account into the new account.
Keep in mind that the new beneficiary must be a family member of the old beneficiary in order to avoid penalties and taxes. According to the IRS, family members include children and their descendants, stepchildren, siblings, parents, stepparents, nieces, nephews, aunts, uncles, in-laws and first cousins. States can also impose additional restrictions, such as age and residency requirements.
Before you make a beneficiary change, think back to the original source of the funds that were used to create the account. If that money was already owned by a minor child through an UTMA/UGMA custodial account, beneficiary changes are generally not allowed before the original beneficiary's 18th or 21st birthday (depending on the state). These "custodial 529 plans" also come with a sunset provision for account ownership— when the beneficiary of a custodial 529 plan reaches the age of legal ownership, they can contact the 529 plan administrator and take direct ownership of the account.
Changing Your Investment Options
529 savings plans can help families prepare financially for education costs. However, there’s a trade-off: The account owner has little control over the investments. That means the account owner can’t direct the underlying investment decisions and has limited flexibility to change the investment options on their existing contributions. But you can generally direct your investment options on your future contributions at any time.
If you're unhappy with your portfolio's investment performance, you can generally make changes to your portfolio twice per calendar year. In addition, you may have the opportunity to change the investment portfolio if you change the account beneficiary. Alternately, you can shop around for the investment options you prefer by doing a "same beneficiary" rollover to another 529 plan (savings plan or prepaid tuition plan) once per calendar year without penalty.
Changing Your Monthly Contributions
Most 529 plans allow you to automatically withdraw contributions from your bank account — and some offer a discount for doing so! To change the amount of your contribution or the date you contribute each month, you can visit the plan's website or reach out to your Farm Bureau agent or financial advisor for help.
Switching to a New 529 Plan
Not all 529 plans are alike. If you're unhappy with your current 529 plan's investment performance or its perks, you can switch to another 529 plan. A rollover to another 529 plan without a change in beneficiary is allowed once per calendar year without penalty. If you do roll over your account more than once a year, you'll need to change the beneficiary to another qualifying family member to avoid paying a penalty.
Is a 529 Plan Right for You?
There are a variety of funding options for students. Before investing in a 529 plan, it’s important to consider the investment objectives, risks, charges and expenses carefully. Your Farm Bureau financial advisor can help you determine the best way to manage your financial situation and prepare for the future.