If you’re one of the millions of parents or grandparents who’ve invested money in a 529 plan, now may be a good time to see how your plan stacks up against the competition. Mediocre investment returns, higher-than-average fees, limited investment options and flexibility–these factors might lead you to conclude that you could do better with another 529 plan or a different college savings option altogether. You can research 529 plans at the College Savings Plans Network website at collegesavings.org. If you discover that your 529 plan’s performance has been sub-par, what options do you have?
One option is to do a “same beneficiary rollover” to a different 529 plan. Under federal law, you can roll over the funds in your existing 529 plan to a different 529 plan (college savings plan or prepaid tuition plan) once every 12 months without having to change the beneficiary and without triggering a federal penalty.
Once you decide on a new 529 plan, the rollover process is fairly straightforward. Call your existing 529 plan to see what steps are required; some plans may impose a fee for a rollover, so make sure to ask. Then call your new 529 plan and establish an account; your new plan should have a process in place to accept rollover funds. You must complete the rollover to the new 529 plan within 60 days of receiving a distribution from your former 529 plan to avoid paying a penalty.
If you want to roll over the funds in your existing 529 plan to a new 529 plan more than once in a 12-month period, you’ll need to change the designated beneficiary to another qualifying family member to avoid paying a federal penalty. As a workaround, you can change the new beneficiary back to the original beneficiary later.
Change your investment strategy in your current 529 plan
Just because you can switch to a new 529 plan doesn’t necessarily mean you should. If the new 529 plan you’re considering has roughly the same mix of investment choices and similar fees as your current plan, you might ask yourself whether you’d be better off staying put and simply changing your current investment allocations. This is especially true if you have invested in your own state’s 529 plan and the availability of related state tax benefits is contingent on you remaining in your state’s plan.
When changing your investment options, it’s important to distinguish between your existing contributions and your future contributions. Most 529 college savings plans let you change the investment options for your future contributions at any time. So, for example, if you originally picked a more aggressive investment option, you can choose a different one (or more than one) for your future contributions.
The rules are stricter when it comes to your existing contributions. If you’re unhappy with the investment performance of your current investment choices but don’t want to switch plans completely (using the rollover option described earlier), 529 college savings plans are federally authorized (but not required) to let you change the investment options for your existing contributions twice per calendar year (prior to 2015, the rule was only once per year). Check to see whether your 529 plan offers this flexibility.
Choose other savings options that give you more investment control
If your 529 plan investment returns have been lackluster, you might wonder whether you should continue putting money into your account. Although many 529 plans offer a range of investment options that you can pick from, you might decide that you’d like more control over your college investments. In that case, you might consider using an entirely different savings option, such as a Coverdell education savings account, a custodial account, or an IRA, all of which let you choose your underlying investments.
As you evaluate your options, keep in mind that any college investment strategy should be reexamined periodically in light of new laws and changes in your individual circumstances.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. 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.
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