Susan E. Thomas CPA
Newsletter
Making Changes to Your 529 Account

529 plans are designed to accommodate the account changes that you may need to make over the years. Whether you need to change the account owner or beneficiary, your investment options, or your monthly contributions, here's what you'll need to know.

Changing the beneficiary

If the existing beneficiary no longer needs the funds in your 529 account (e.g., he or she gets a full scholarship or decides not to go to college), you may want to designate a new beneficiary. All 529 plans allow the account owner to change the designated beneficiary, and it's actually quite simple to do. Just fill out a change of beneficiary form and submit it to your 529 plan administrator. Depending on your plan, you may have to pay an administrative fee.

If the existing beneficiary needs only some of the funds in your 529 account, you can also do a partial change of beneficiary, which involves establishing another 529 account for a new beneficiary and rolling over some funds from the old account into the new account.

Note, though, that in order to avoid penalties and taxes when changing beneficiaries, the new beneficiary must be a family member of the old beneficiary. According to Section 529 of the Internal Revenue Code, "family members" include children and their descendants, stepchildren, siblings, parents, stepparents, nieces, nephews, aunts, uncles, in-laws, and first cousins. States are free to impose additional restrictions, such as age and residency requirements.

Another important consideration when changing 529 plan beneficiaries is the original source of the funds that were used to create the account. If a 529 plan is opened using money already owned by your minor child through an UTMA/UGMA custodial account, the plan administrator generally will not allow beneficiary changes prior to the original beneficiary's 18th or 21st birthday (depending on the state). In addition, these "custodial 529 plans" also come with a sunset provision for account ownership or control — when the current beneficiary of a custodial 529 plan reaches the age of legal ownership, he or she will have the right to contact the 529 plan administrator and take direct ownership of the 529 account, regardless of who may be in control of the account up to that time.

Changing the account owner

Most states allow a change in ownership of a 529 account. And unlike a change in beneficiary, there is usually no requirement that the new account owner have any particular relationship with the original account owner. Many states, however, allow a change in account owner only when the original account owner dies or in special circumstances (e.g., divorce). Check with your plan administrator for more details.

Changing your investment options

One of the disadvantages of a 529 savings plan is the lack of investment control an account owner has. Participants in a 529 plan aren't allowed to direct the underlying investment decisions of the plan and have limited flexibility to change the investment option on their existing contributions.

If you're unhappy with your portfolio's investment performance, you can generally make changes to your existing portfolio twice per calendar year. Also, some plans may allow you to make changes to your existing investment portfolio if you change the beneficiary of the account. By contrast, you can generally direct your investment options on your future contributions at any time. Make sure to check the rules of any plan you're considering.

There is one other option that's allowed by federal law and not subject to a plan's own rules. 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 make contributions by having them automatically debited from your bank account. Some plans may even offer discounts for enrolling in an automatic payment plan. If you are using this method and wish to change the amount of your contribution or the date you contribute each month, visit the plan's website to make these routine changes, or contact the plan administrator for more details.

Switching to a new 529 plan

If you're unhappy with your current 529 plan's investment performance or you believe that another plan offers more advantages, you may want to switch to another 529 plan. As mentioned before, a rollover to another 529 plan (savings plan or prepaid tuition plan) without a change in beneficiary is allowed once per calendar year without penalty. However, if you want to 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. Make sure to check with your existing plan to see if there is a fee to exit the plan or change the beneficiary.

Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer's official statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.



Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011