Overview

A 529 plan rollover moves dollars from one Section 529 college-savings account to another without federal income tax or penalty when done properly. That tax treatment is governed by the IRS (see IRS, “529 Plans” and Publication 970) and is straightforward in most cases. But financial aid offices look at account ownership, beneficiary, and the account balance at the time of application. A rollover that changes any of those things — or that happens close to the date you complete the FAFSA or CSS Profile — can change the assets reported and therefore the amount of need-based aid a student receives.

In my practice helping families plan college funding, I’ve seen otherwise-small rollovers reduce grant eligibility simply because the parent’s reported assets ticked up on the aid application. That outcome is usually avoidable with correct timing and documentation.

Sources: IRS (529 plans) and Federal Student Aid (how assets affect eligibility). See: https://www.irs.gov/individuals/529-plans and https://studentaid.gov/h/apply-for-aid/fafsa.

How the FAFSA and CSS Profile count 529 funds

  • FAFSA (Federal Student Aid): Parent-owned 529 plans are reported as parental assets and are assessed at a low percentage when calculating the Student Aid Index (SAI). Student-owned assets (including a 529 in the student’s name) are assessed at a higher rate. For dependency determinations, most college financial aid formulas treat parent-owned 529s as parental assets. See Federal Student Aid guidance: https://studentaid.gov/articles/how-do-assets-affect-my-aid/

  • CSS Profile (College Board): Many private colleges use the CSS Profile, which asks similar asset questions but can request more detailed balances. The CSS Profile generally treats parent-owned 529s as parental assets, but colleges may vary. See the College Board for CSS Profile specifics: https://cssprofile.collegeboard.org/

  • Grandparent-owned 529s: Historically, distributions from a grandparent-owned 529 have not been reported as a parent asset on the FAFSA but were counted as student untaxed income in the following year after distribution — which can reduce need-based aid when the student files for the next award year. Because rules and form designs change, always confirm with the financial aid office before scheduling large distributions.

Authoritative references: IRS Publication 970 and Federal Student Aid pages (links above).

Key rules for 529 rollovers you need to know

  1. Tax-free rollover mechanics: You can roll over funds from one 529 plan to another for the same beneficiary without triggering federal income tax or penalty if done properly. That includes direct trustee-to-trustee transfers and indirect rollovers where you redeposit within the IRS 60-day window. (IRS: 529 plan rules)

  2. One-rollover-per-12-months limit: The IRS limits tax-free rollovers between 529 accounts for the same beneficiary to one tax-free rollover in a 12-month period for a given account owner. That means you can’t repeatedly move the same dollars through different 529s without risking tax consequences. See IRS Publication 970 for details.

  3. Ownership and beneficiary changes: Changing the owner of a 529 during a rollover or moving funds to an account owned by someone else (for example, from a grandparent-owned plan to a parent-owned plan) can have gift-tax, financial-aid, and legal implications. Such a change may be treated as a new contribution or gift; consult a tax advisor before switching owners.

  4. Timing relative to applications: FAFSA and CSS Profile asset snapshots are sensitive to when you file. The FAFSA asks for current asset values as of the date you complete it — so a rollover that increases (or decreases) a parent-owned 529 balance before filing can change the reported assets used in the SAI calculation. The CSS Profile may ask for account balances as of different dates, depending on the school.

Primary sources: IRS (529s) and Federal Student Aid.

Practical examples and likely effects

Example A — Parent-to-parent rollover, filed FAFSA after transfer

  • Scenario: A parent transfers $30,000 from a high-fee state plan to a different state plan by doing a trustee-to-trustee rollover. The parent completes the FAFSA after the transfer is settled.
  • Likely effect: The $30,000 remains a parental asset and is counted the same way for SAI calculation. If the balance is unchanged, aid eligibility will be essentially the same. The main risk is if timing leads to reporting the larger or smaller balance than intended.

Example B — Grandparent-owned plan rolled into parent-owned plan before FAFSA

  • Scenario: A grandparent moves $20,000 from a grandparent-owned 529 to a parent-owned 529 and the parent files the FAFSA afterward.
  • Likely effect: Changing ownership to the parent means the balance now appears as a parental asset on FAFSA, which generally has a smaller assessment rate than student untaxed income but still may reduce a student’s need-based aid. Also check gift-tax consequences.

Example C — Rollover close to FAFSA filing (indirect rollover)

  • Scenario: A family withdraws funds intending to redeposit into a new plan and completes the FAFSA while funds are in transit.
  • Likely effect: If the money is out of the account at the time of filing, it may not appear on the FAFSA as a 529 balance — but the withdrawn funds could be treated as cash or bank balance and still must be reported if accessible. This creates reporting risk. Avoid indirect rollovers during critical filing windows; prefer direct trustee transfers and complete rollovers well before filing.

Timing and strategy — reduce unintended aid impacts

Practical, field-tested steps I recommend:

  • Use direct trustee-to-trustee transfers when possible. Direct transfers leave clearer audit trails and avoid the 60-day indirect rollover risks.

  • Avoid rollovers in the weeks before you submit the FAFSA or CSS Profile. If you must move money, do it early in the calendar year so the accounts have settled and you can document closing/opening balances.

  • If a grandparent-owned 529 might reduce aid when distributions occur, consider leaving ownership with the grandparent until after the student files for aid or coordinate with the financial aid office on timing of distributions.

  • Keep detailed records: account statements showing the date and amount rolled over; trustee-to-trustee confirmations; and any change-of-owner paperwork. Financial aid offices commonly request these documents when a rollover occurred in the award year.

  • Talk with the college financial aid office before making ownership changes or large rollovers. Financial aid officers can tell you how that college treats certain balances for institutional aid.

See our guides: Rolling Over Old 529s: When and How and Optimizing FAFSA: Practical Steps to Improve Aid Eligibility.

Documentation and verification — what to expect from schools

Colleges routinely ask for supporting documents when asset balances change materially. Provide:

  • Official account statements before and after the rollover (trustee transfer confirmations are ideal).
  • A brief explanation letter describing the rollover, the parties involved (owner and beneficiary), and the dates.
  • Any gift-tax or change-of-owner paperwork if ownership changed.

If a school flags a rollover as part of a verification, they are generally looking to confirm the source and timing of funds rather than to penalize families. Clear documentation usually resolves questions quickly.

Common mistakes and misconceptions

  • Mistake: Assuming a rollover “resets” the aid calculation. It does not. Financial aid formulas look at the total asset picture and ownership. A rollover that leaves the parent-owned balance the same generally won’t change need-based aid.

  • Mistake: Using indirect rollovers without tracking timing. Indirect rollovers (withdraw and redeposit) create reporting ambiguity and increase the risk of tax errors and FAFSA reporting mistakes.

  • Misconception: All 529s are treated the same across colleges. They’re not: institutional processes for CSS Profile and verification vary. Talk to the school’s financial aid office.

When to get professional help

  • If you’re changing account ownership or moving funds between owners, consult a tax advisor or estate planner because of potential gift-tax consequences.
  • If rollovers are part of a broader college-funding strategy involving multiple children or expected distributions from grandparent-owned accounts, consider working with a certified financial planner who understands financial aid formulas.

Related reading: Education Savings Strategies: 529 Plans, Coverdell, and Alternatives.

Bottom line

A 529 plan rollover is a useful tool for lowering fees, improving investments, or moving plans between states. But because college financial aid calculations depend on account ownership and balances at the time of application, rollovers can change need-based aid amounts if executed without attention to timing and documentation. Use direct transfers, avoid rollovers during filing windows, keep clear records, and consult a tax or financial aid professional when ownership changes are involved.

Professional disclaimer: This article is educational and does not constitute individualized tax, legal, or financial advice. Rules for 529 plans, tax treatment, and financial aid can change; consult the IRS (https://www.irs.gov/individuals/529-plans), Federal Student Aid (https://studentaid.gov), and a qualified advisor for advice tailored to your situation.

Author note: In my experience advising families, a 24–48 hour window to confirm a trustee-to-trustee rollover and a pre-filing checklist for FAFSA has prevented more aid surprises than any single investment decision.

Authoritative sources and further reading: