Quick answer

A rollover moves 529 assets from one plan to another (same or different state) without taxable consequences when handled correctly. You can also change the beneficiary to most family members of the original beneficiary tax‑free. However, specific timing rules, state tax recapture possibilities, and new options under SECURE 2.0 (529→Roth IRA rollovers) mean you should confirm the details before you act.

Why rollovers and beneficiary changes matter

  • Flexibility: Families’ education needs change — beneficiaries graduate, choose other paths, or decline to use higher education funds. Rollovers and beneficiary changes let you shift assets where they’re needed.
  • Cost and performance: You may move a 529 to a plan with lower fees or better investments.
  • Tax planning: Done properly, these moves keep earnings tax‑free when used for qualified education expenses and avoid penalties.

Key rules and terminology

  • Qualified 529 plan: A state‑sponsored (or employer) plan that meets IRC §529 requirements (see IRS Publication 970).
  • Direct rollover vs. indirect distribution: A direct trustee‑to‑trustee rollover avoids withholding and is the recommended method. An indirect distribution (you receive the check) risks tax/penalty if not redeposited within 60 days.
  • Family member: IRS defines eligible family members broadly (siblings, parents, children, cousins, in‑laws, and certain extended relations). Changing to a family member generally keeps the tax benefits.

How rollovers work — step by step

  1. Confirm the destination plan is a qualified 529 plan.
  2. Check state tax consequences. If you claimed a state tax deduction or credit for prior contributions, your state may recapture those benefits on an out‑of‑state rollover. Contact your state plan or use resources like SavingForCollege.org for specifics.
  3. Ask your current plan administrator to perform a trustee‑to‑trustee transfer (direct rollover). This avoids 60‑day timing traps and reduces paperwork.
  4. Verify the rollover frequency limit. You can only roll the same beneficiary’s funds from one 529 plan to another once in a 12‑month period without special circumstances (IRS Publication 970 notes limitations and anti‑abuse rules).
  5. Keep records — dates, paperwork, and confirmations — for tax filing and financial‑aid forms.

Changing beneficiaries — rules and examples

  • Who can become the beneficiary? Most changes are allowed if the new beneficiary is a “member of the family” of the original beneficiary as defined by the tax code (children, siblings, parents, nieces/nephews, in‑laws, and more).
  • No federal tax when you change to an eligible family member. If the new beneficiary is not a family member, the transfer is treated as a distribution and could be subject to income tax and a 10% penalty on earnings.
  • Example: A parent names Child A as beneficiary. Child A receives a scholarship and doesn’t need all funds. The parent changes the beneficiary to Child B (a sibling) — this is a tax‑free change.
  • Beneficiary change frequency: There is no explicit IRS limit on changing beneficiaries, but frequent strategy changes could raise questions; also, state rules and plan policies may limit certain swaps.

SECURE 2.0 — 529 to Roth IRA rollovers (new option)

  • Brief overview: The SECURE 2.0 Act (Pub. L. 117‑328) introduced a limited rollover pathway to move unused 529 funds into a Roth IRA for the same beneficiary, effective in 2024.
  • Key conditions (summary):
  • The 529 account must have been open for at least 15 years.
  • Annual Roth contribution limits apply (you can only move amounts that would otherwise be allowable Roth contributions in a given tax year, subject to the beneficiary’s earned‑income limits).
  • Lifetime rollover cap: $35,000 per beneficiary (aggregate).
  • The rollover must be to the beneficiary’s Roth IRA (not to another person’s IRA).
  • Practical impact: This creates another tax‑efficient option if a beneficiary doesn’t use all the funds for education. But the rules are detailed — confirm plan acceptance of rollovers, track account age, and verify Roth contribution eligibility. See the SECURE 2.0 text and updates from the IRS for authoritative guidance (Congress.gov; IRS releases).

Tax consequences of nonqualified withdrawals and exceptions

  • Nonqualified withdrawals: If you withdraw earnings and they are not used for qualified education expenses, earnings are subject to income tax and typically a 10% federal penalty. The penalty is on the earnings portion only; contributions (basis) are returned tax‑free.
  • Notable exceptions to the 10% penalty (income tax still applies):
  • Scholarship: If the beneficiary receives a tax‑free scholarship, you can withdraw the amount of the scholarship penalty‑free, but earnings remain taxable.
  • Death or disability of the beneficiary.
  • Attendance at a U.S. Military Academy (also treated like a scholarship exception).
  • Always keep receipts and documentation proving qualified expenses (tuition bills, receipts for books, room and board statements if applicable).

Financial aid, FAFSA, and net‑price effects

  • FAFSA treatment: For dependent students, a parent‑owned 529 is reported as a parental asset on the FAFSA and typically has a relatively small impact on need‑based aid eligibility (the parental asset assessment rate is lower than a student asset). A student‑owned 529 may count differently.
  • Timing matters: Large contributions or rollovers made between FAFSA application dates can affect aid calculations for the upcoming year. See our FinHelp article “How 529 Plan Rollovers Affect Financial Aid Eligibility” for a deeper look and scenarios: How 529 Plan Rollovers Affect Financial Aid Eligibility.

State tax and plan rules to check before acting

  • State tax deductions/credits: If you claimed a state income tax deduction for contributions, rolling to an out‑of‑state plan may trigger recapture of that state benefit. Confirm with your state’s plan office.
  • Plan restrictions: Some plans have minimums or processing rules that affect how quickly a rollover completes or whether certain investment options transfer directly.
  • Use tools and comparison sites to check fees and performance before moving funds. See our guide “Rolling Over Old 529s: When and How”: Rolling Over Old 529s: When and How.

Practical checklists — rolling over and changing beneficiaries

Before a rollover:

  • Confirm the target plan accepts rollovers and compare fees, investment options, and state tax treatment.
  • Ask your current plan for a trustee‑to‑trustee transfer form and timeline.
  • Confirm you are not violating the 12‑month rollover rule for the same beneficiary.
  • If you claimed state tax benefits, ask about recapture rules.

Before changing a beneficiary:

  • Verify the new beneficiary qualifies as a family member.
  • Consider financial aid consequences if the new beneficiary will be applying for need‑based aid.
  • If you plan future estate or gift strategies, coordinate with your estate adviser — changing a beneficiary does not replace formal estate planning documents.

Common mistakes and how to avoid them

  • Taking an indirect distribution and missing the 60‑day redeposit window — always choose a trustee‑to‑trustee rollover.
  • Overlooking state tax recapture after an out‑of‑state rollover — check state rules first.
  • Assuming you can roll funds between the same two accounts multiple times in a year to game contribution limits — the once‑per‑12‑months rule can block this.
  • Forgetting to document qualified educational expenses — keep bills and receipts in case of IRS questions.

Real‑world examples (anonymized)

  • Family A: Moved a low‑cost 529 in State X to a no‑fee plan in another state after comparing long‑term costs. They performed a trustee‑to‑trustee transfer and avoided state recapture by first confirming their state’s rules.
  • Family B: Beneficiary earned a scholarship. Parent changed beneficiary to a younger sibling and later, when the younger sibling didn’t use all funds, converted unused money into a Roth IRA for the beneficiary under SECURE 2.0 rules (after meeting the 15‑year account age requirement).

Professional tips

  • Start with the plan administrators. They can explain the quickest, cleanest way to move money and provide required forms.
  • Talk to a tax professional if state tax deductions were claimed or if you plan complex moves (multiple rollovers, Roth conversions, or estate‑planning uses).
  • Keep separate records of contributions and earnings to calculate taxable portions if you make a nonqualified withdrawal.

Further reading and internal resources

Authoritative sources

  • IRS Publication 970, Tax Benefits for Education (current edition) — general 529 rules, nonqualified withdrawal penalties, and scholarship exception (IRS.gov).
  • SECURE 2.0 Act (Pub. L. No. 117‑328) — for 529→Roth IRA rollover provisions (Congress.gov; official legislative text).
  • SavingForCollege.org — state tax details and plan comparisons.

Disclaimer

This article is educational and does not constitute personalized tax, legal, or investment advice. Rules can vary by state and change over time. Consult a CPA, tax attorney, or CFP® before making complex rollovers or beneficiary changes.