Rolling Over Old 529s: When and How

Quick answer

A 529 rollover moves money from one 529 account to another without generating ordinary income or penalties when completed correctly. Typical reasons include saving on fees, getting stronger investment options, consolidating accounts, or taking advantage of another state’s tax deduction or credit. The IRS treats rollovers as tax-free if you transfer directly and follow the once-per-12-month rule for each beneficiary (IRS Topic 310) (https://www.irs.gov/taxtopics/tc310).

Why consider rolling over an old 529?

• Lower fees: High plan fees compound and erode returns over years. Moving to a low-cost plan can materially increase the value of savings.
• Better investment lineup: Later-market or better-managed plans may offer age-based portfolios, active strategies, or target-date funds that match your risk profile.
• State tax benefits: Some states offer income tax deductions or credits for contributions. If you move, change residency, or want a different state’s benefits, a rollover can capture those advantages.
• Consolidation and simplicity: Families with multiple 529s or accounts opened years apart often consolidate to reduce paperwork and better manage asset allocation.
• Beneficiary planning: You can roll funds to another 529 for a sibling or qualified family member to re-purpose unused balances.

In my practice advising families on college funding, I’ve seen most meaningful gains come from fee reductions and consolidation. One client trimmed their plan’s expense ratio from 1.05% to 0.25%; over 15 years that difference projected to increase their ending balance by tens of thousands of dollars.

Key rules and timing to know

• One-rollover-per-beneficiary-per-12-months: The IRS limits rollovers to one tax-free rollover for the same beneficiary in any 12-month period. This is measured per beneficiary, not per account owner. (IRS Topic 310: https://www.irs.gov/taxtopics/tc310)
• Trustee-to-trustee transfer is safest: A direct transfer between plan administrators avoids withholding, missteps, and the need to redeposit funds within 60 days.
• Indirect rollovers are riskier: If you receive a check, you generally have 60 days to deposit into another 529 to avoid income taxation and penalties, and the once-per-12-months rule still applies.
• Watch state tax recapture rules: If you claimed a state tax deduction or credit for contributions to the old plan, rolling may trigger recapture of that deduction in your state. Check state rules before you move funds.
• New 529-to-Roth IRA option (SECURE 2.0): The SECURE 2.0 Act (2022) created a limited pathway to roll unused 529 money to a beneficiary’s Roth IRA, subject to multiple conditions: a lifetime rollover cap (statutory lifetime limit is $35,000), Roth IRA annual-contribution limits and eligibility rules, and a 529 account that’s been open for at least 15 years for amounts to qualify. Confirm the most current IRS guidance and plan acceptance — not all plan administrators immediately implemented the feature. (SECURE 2.0 Act, H.R. 5378; see plan and IRS guidance for current details.)

Step-by-step: How to roll over a 529 correctly

1. Review both plans’ rules and state tax consequences. Note any state deduction recapture rules and whether the receiving plan accepts rollovers.
2. Compare costs and investments. Look at expense ratios, enrollment/maintenance fees, and the underlying fund choices.
3. Contact the receiving plan and request a rollover packet or online transfer form. Ask whether they require a direct trustee-to-trustee transfer.
4. Complete authorization: Typically the account owner signs the transfer form authorizing the sending plan to move funds directly.
5. Confirm the transfer method: Direct electronic transfer is fastest; mailed check between trustees is slower. If you receive a check payable to the new plan, deposit promptly.
6. Verify the transfer and update beneficiary/investment elections after funds arrive.
7. Document everything in case of later questions from the IRS or your state.

Checklist for a safe rollover

• Use trustee-to-trustee transfer when possible.
• Confirm you haven’t done a rollover for the same beneficiary in the prior 12 months.
• Check state tax recapture triggers if you took a state deduction.
• Keep records: transfer forms, confirmation statements, and any correspondence.

Common scenarios and examples

• Consolidation: A grandparent set up two different 529s for the same child over time. Consolidating to one low-cost statewide plan simplified asset allocation and reduced fees.
• Better options: Parents moved from a broker-sold 529 with limited options to a direct-sold state plan offering age-based portfolios, aligning the investment strategy with the child’s timeline.
• Scholarship or unused balance: If a student receives a scholarship, you can withdraw the scholarship amount penalty-free (you’ll pay income tax on earnings) or roll the funds to a sibling’s account. Rolling to another 529 keeps funds tax-advantaged for family members.

Pitfalls and mistakes to avoid

• Exceeding the one-rollover rule: Trying to move the same beneficiary’s funds more than once in 12 months can create taxable distributions and penalties.
• Ignoring state tax recapture: Some states require you to add back the amount of prior deductions to income if you roll out; check your state rules.
• Doing an indirect rollover and missing the 60-day window: This can turn the rollover into a taxable distribution (earnings taxed plus 10% penalty if not used for qualified education expenses).
• Overlooking administrative blackout periods: Some plans temporarily suspend transfers during conversion or window updates — ask the plan if any delays are expected.

How a rollover can affect financial aid

Rolling between 529 plans does not change ownership, so it generally does not change how the asset is treated on the FAFSA (parent-owned 529s remain parental assets). Timing a rollover during the academic year usually won’t affect aid eligibility, but large distributions used for current-year qualified expenses could change expected family contribution calculations. If financial aid is a major concern, coordinate with your college financial aid office or advisor before moving money.

Professional tips

• Run a fee-savings model: Compare expense ratios and simulate how fee differences affect future balances.
• If you live in a state with a strong tax deduction for your plan, weigh the value of the deduction against net investment costs in alternative plans.
• Consider partial rollovers. You can move a portion of the account to test service and performance before moving everything.
• If you expect your beneficiary to use leftover funds for grad school, check plan rules for grad-school qualified expenses and the new 529-to-Roth IRA rules.

Useful resources and further reading

• IRS 529 Plan basics (Topic 310): https://www.irs.gov/taxtopics/tc310
• SECURE 2.0 Act summary (Congress.gov): https://www.congress.gov/bill/117th-congress/house-bill/5378
• CFPB and college savings guidance: https://www.consumerfinance.gov/

Internal resources on FinHelp

• Read our primer on the basics of a 529 plan: “529 Plan” (https://finhelp.io/glossary/529-plan/)
• If you’re thinking about state residency, see: “529 Plan State Residency Considerations” (https://finhelp.io/glossary/529-plan-state-residency-considerations/)
• For the new rollover pathway into retirement accounts, see: “529 to Roth IRA Rollover” (https://finhelp.io/glossary/529-to-roth-ira-rollover/)

Frequently asked questions

Q: Can I roll over to any 529 plan?
A: Yes, but the new plan must be for the same beneficiary or a qualified family member, and you must respect the one-rollover-per-12-months rule.

Q: What if my state requires recapture of tax benefits?
A: You may owe state income tax on the portion of funds tied to prior state tax deductions. Contact your state tax agency or a tax professional.

Q: Will a rollover trigger gift-tax issues?
A: No — moving funds between 529s for the same beneficiary is not a gift. However, new contributions to a 529 may have gift-tax consequences if they exceed annual exclusions or use the five-year election.

Professional disclaimer

This entry is educational and not individualized tax or investment advice. Rules about rollovers, state tax recapture, and new 529-to-Roth-IRA provisions can change; consult a certified financial planner or tax advisor for advice tailored to your situation.