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.
Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This article was prepared by Broadridge.
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