A 529 education savings plan is designed to be flexible and accommodate changes in the account you may need to make over the years. Whether it is changing the account owner or beneficiary, your investment options or your monthly contributions, here’s what you will need to know.

Changing the Beneficiary

If an existing beneficiary no longer needs the funds in their 529 account (e.g., they get a full scholarship or they graduate), you may want to designate a new beneficiary. All 529 plans allow this, and it can be done by filling out a change in beneficiary form and submitting it to your 529 plan administrator. Depending on your plan, there may be an administrative fee.

If the existing beneficiary needs only some of the funds in their 529 account, you can also do a partial change of beneficiary, which involves establishing another 529 account for a new beneficiary and rolling over funds. To avoid penalties and taxes when changing beneficiaries, the new beneficiary must be a member of the same family.

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 a Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors Act (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 plan administrator and take direct ownership of the 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 plan. Unlike a change in beneficiary, there is typically no requirement that the new owner has any relationship with the original owner. Many states, however, allow a change in account owner only after the original account owner dies or under special circumstances.

Changing Your Investment Options

One disadvantage of a 529 savings plan is the lack of investment control by an account owner. 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.

You can generally make changes to the 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 typically direct your investment options on your future contributions at any time. Make sure to check the rules of any plan you're considering.

One additional option is to 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 though monthly automatic debits from your bank account. If you wish to change the amount you are contributing to the plan each month, visit the plan’s website to make these routine changes, or contact your plan administrator for more details.

Switching to a New 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. 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.

Managing Overfunded 529 Plans

Excess funds in a 529 plan are subject to a 10% withdrawal penalty if they are not used for education related expenses. Here are four different strategies to help avoid this penalty.

Use 529 Funds for Additional Education or Training

Consider leveraging the funds for postgraduate degrees/courses that can help to enhance professional credentials. Alternatively, specialized certification can help to provide practical, on the job skills and improve their career.

Transfer the 529 Balance to Another Beneficiary

As previously mentioned, you can transfer the balance of a 529 plan to another beneficiary under certain circumstances.

Pay Student Loans with the 529 Funds

The SECURE Act of 2019 allows you direct up to $10,000 from a 529 plan toward federal and private student loan payments. It is important to note that this penalty-free withdrawal applies only to student loans and no other debt.

Roll Extra 529 Funds into a Roth IRA

The SECURE 2.0 Act has introduced the ability to transfer funds from a 529 plan into a Roth Individual Retirement Account (IRA) for the beneficiary. There are a number of restrictions on this, including a lifetime limit of $35,000, the 529 plan must have been open for over 15 years and the amount you want to roll over must have been in the 529 plan for at least five years.

Keep in mind that a change in beneficiary re-starts the 15-year clock with the opening of the new account.

As you plan for the future, the experienced team with Busey Wealth Management can help you develop sound strategies around your unique financial situation. Learn more about our comprehensive services and find an advisor near you at busey.com/wealth-management.

This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.

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