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Can You Move Money Between 529 Plans?

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If your child decides not to attend college or does not use all of the money in their 529 college savings plan, you have options to avoid a withdrawal penalty.  The rules for moving money between 529 plans differ slightly depending on who is receiving the funds:


  • Scenario 1: You are moving out of state and want to rollover your existing 529 plan to a 529 plan in your new state of residence. The plan will have the same beneficiary. You can rollover 529 accounts for a single beneficiary once every 12 months. If you exceed this limit, the amount may be considered a non-qualified withdrawal subject to income tax and penalties.


  • Scenario 2: Trent, your oldest son, is graduating college with a $50,000 balance remaining in his 529 college savings plan. Your youngest son, Isaac, a high school freshman, also has a 529 Savings Plan. You transfer the remaining balance of Trent’s 529 plan to Isaac’s 529 plan. Most plans allow you to move money between 529 plans as often as you’d like and in any amount, so long as it does not exceed the lifetime maximum and the plans are in the same state. Certain plans may impose restrictions, so be sure to check their guidelines.


  • Scenario 3: You have 529 plans for your three children in three different states— Mara, 18; Sally, 8; and Ethan, 14. Mara is preparing to attend college but does not have enough money to cover all of her expenses. You transfer $10,000 from Sally’s 529 plan to Mara’s 529 plan. If you move money from one 529 plan to another plan in a different state, you may have to pay income tax on contributions from the previous state. Consult the plan administrator and state tax board in both states before transferring funds.


It’s essential to consult plan administrators of each plan before making transfers as each plan may set limits on the number of transfers. In the event you make a transfer that is not permitted, it would be considered a non-qualified withdrawal subject to income tax and penalties.


Tax Penalties For Transferring Money Between 529 Plans

In some cases, you may be responsible for taxes when transferring money from one 529 plan to another.


State Taxes

If you are transferring money in a 529 plan from one state to another, you may incur state taxes and also lose the ability to take tax deductions going forward.  If you plan to move money between 529 plans, it’s good to run it by your plan administrator(s) on both plans and check the state tax board in both states if they are not the same plan.


“Generation-Skipping” Tax

If a grandparent is a beneficiary on a 529 plan, changing the beneficiary to a grandchild, or another relative more than one generation younger than the grandparent could result in the “generation-skipping” tax. This tax is usually applied in cases where the estate value exceeds 5 million.


Alternatives to Moving Money Between 529 Plans

Instead of moving money between 529 plans, there may be times when it is easier to preserve the funds in a 529 without taking penalties on a withdrawal.


Change the Beneficiary

Instead of transferring funds from a 529 account, you may want to change the beneficiary. You can change the beneficiary to an eligible relative once per year.


Scenario 1: Your son Jake is in his senior year of college and has $12,000 left in his 529 plan that he won’t use. Your oldest son Caleb just had a baby daughter named Sara. Instead of transferring funds to a 529 plan, you change the beneficiary from Jake to Sara. You can now contribute to the 529 plan and save the funds for Sara when she is ready to attend college.


Scenario 2: You have saved $200,000 in a 529 plan for your daughter Amy who planned to earn a four-year degree in Kinesiology. Instead, Amy decides to use the plan to attend a $10,000 massage therapy program. You change the beneficiary to yourself and use the remaining $190,000 to attend an MBA program.


If you want a person who doesn’t already have a 529 plan to have access to the funds, changing the beneficiary is an alternative to creating a new 529 plan and transferring funds.


Transfer to an ABLE Account

Like the 529, the ABLE (Achieving a Better Life Experience) accounts are tax-advantaged accounts for individuals with disabilities and special needs that can be used for housing, medical, educational, and other expenses. Because of the Tax Cuts and Jobs Act, money in 529 plans can be transferred to an ABLE account for the beneficiary or a relative.


Though money can be transferred from a 529 plan to an ABLE account, there are limits. First, only $15,000 per year can be transferred from a 529 plan to an ABLE account. Second, if the ABLE account balance exceeds $100,000, SSI/SSDI benefits are suspended until the balance drops below that limit. Medicaid is not affected.


A Final Word on Moving Money Between 529 Plans

In general, you can move money between 529 plans. The number of times you can transfer money and the taxes will depend on the beneficiary and the state in which the 529 plans are held. If you plan to move money between 529 plans, consult the state tax board, plan administrator and your tax professional to ensure that your transfers are tax and penalty free.

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