During our webinar about How to Reach Your College Savings Goals with a 529 Plan, participants asked dozens of questions. Here are the answers to questions about 529 plan rollovers.
Can grandparents transfer funds from a 529 plan to a parent’s 529 plan account for the same beneficiary child?
Yes, grandparents can rollover funds from a grandparent-owned 529 plan to a parent-owned 529 plan for the same beneficiary.
However, it is best that the parent-owned 529 plan be in the same state as the grandparent-owned 529 plan. Some states consider an out-of-state rollover to be a non-qualified distribution, which will be subject to state income tax on the earnings portion of the rollover and possible recapture of state income tax breaks attributable to the rollover. If the parent does not already have a 529 plan in the same state as the grandparent-owned 529 plan, they can create a new parent-owned 529 plan in that state.
Grandparents can also contribute to any 529 plan, even a parent-owned 529 plan. You do not need to be the owner of a 529 plan to contribute to it. Contributing to a parent-owned 529 plan, as opposed to a grandparent-owned 529 plan, would have avoided the need to transfer funds from a grandparent-owned 529 plan to a parent-owned 529 plan.
My current 8th grader has an UTMA that his grandparents started. But I believe the UTMA has a higher percentage ding when applying for financial aid, I was wondering if I should stop investing in it and open a 529 fund instead. Or can it be converted into a 529 fund?
UGMA and UTMA bank and brokerage accounts are reported as a student asset on the Free Application for Federal Student Aid (FAFSA). Student assets reduce eligibility for financial aid by 20% of the asset value. Parent assets, on the other hand, are assessed on a bracketed scale with a top bracket of 5.64%. Thus, $10,000 in the student’s name reduces financial aid by $2,000 while $10,000 in the parent’s name reduces financial aid by at most $564.
An UGMA or UTMA can be converted into a special type of 529 plan account called a custodial 529 plan account. The custodial 529 plan is titled the same as the original UGMA or UTMA account, with the child as both account owner and beneficiary. If the child is under the age of majority, a custodian will need to manage the account on behalf of the child until the child reaches the age of majority. (If the grandparents wish to retain control over the account, they can serve as custodians until the child reaches the age of majority.)
Since 2009, a custodial 529 plan account is reported as a parent asset on the FAFSA, not the student’s asset, yielding a more favorable financial aid impact.
Wondering how your 529 plan may impact financial aid? Use our Financial Aid Calculator to estimate the expected family contribution (EFC) and your financial need.
Can 529 money roll over into an ABLE account for a special needs child?
Yes, 529 plans may be rolled over into an ABLE account through 2025, inclusive.
The aggregate total of rollovers from 529 college savings plans is limited to the annual gift tax exclusion, which is $15,000 in 2020. Five-year gift tax averaging does not apply to such rollovers.
Cash contributions and rollovers from other ABLE accounts are also allowed, as are contributions from the beneficiary (capped at the beneficiary’s income or the poverty line, whichever is less).You may want to keep the money in the 529 plan until it is needed for special needs expenses, then rollover a year’s worth of funds into the ABLE account before taking a distribution. ABLE accounts have a forfeiture clause that allows states to seize the money in an ABLE account upon death of the beneficiary, while 529 plans do not.