The 529 plan you choose can have a big impact on your total savings when it’s time to pay for college. However, a family’s needs may change over time and sometimes it makes sense to switch 529 plans.
If you’re looking to change your college savings strategy you may roll existing 529 plan funds into a new 529 plan once during any 12-month period. You may also decide to keep the existing funds in the original 529 plan account and direct new contributions to a new 529 plan account.
Here are some of the most common reasons why a family might consider switching 529 plans.
1. You moved to another state
All 529 plans offer federal tax-deferred growth and tax-free withdrawals when funds are used to pay for qualified expenses. However, only certain states offer a state income tax deduction or credit for 529 plan contributions. Some of these states offer these income tax benefits only when the family uses the 529 plan to pay for college and will recapture any income tax deductions or credits claimed if the funds are used to pay for K-12 tuition.
If a family is moving to a new state that offers a state income tax benefit for 529 plan contributions, it might make sense to open a new 529 plan in the new state. The family may decide to keep the funds in their existing 529 plan and direct any new contributions to the new 529 plan or do a full or partial rollover to the new 529 plan. In some states, rollover contributions are eligible for a state income tax benefit.
It may be best to keep the old 529 plan as is and open a new 529 plan in the new state if the old state recaptures state income tax breaks for outbound rollovers.
2. You use your 529 plan to pay for K-12 tuition
529 plans were originally designed to help families save for college expenses, but the Tax Cuts and Jobs Act of 2017 expanded 529 plan qualified expenses to include up to $10,000 in K-12 tuition (per year, per beneficiary). Many age-based 529 plan portfolios automatically adjust allocations based on when the beneficiary will enter college. However, families using a 529 plan to pay for K-12 tuition have a shorter time horizon and therefore less time to absorb investment risk. Having a separate 529 plan to save for K-12 tuition will make it easier for families to track their progress and maximize the value of their investments.
529 plans are beginning to offer 529 plan investments for K-12, such as Louisiana’s START K12 program and Kentucky’s enrollment-based 529 plan investment options, but most 529 plans are specifically designed to save for college. Families saving for K-12 tuition may consider a 529 plan that offers target portfolios, which do not automatically adjust.
3. Your children entered high school
With only four years left until the first college tuition payment is due, a family may consider adjusting their college savings strategy to align with the shorter time horizon. This can include:
- Reducing investment risk by moving some or all of their college savings into a state-sponsored prepaid tuition plan or Private College 529
- Switching to an in-state 529 plan that offers a state income tax benefit. In a short time period, the value of a state income tax benefit could be worth more than the benefit of using a 529 plan with lower fees. It can be like getting a discount on tuition.
- Rolling over one year’s worth of tuition from a grandparent-owned 529 plan to a parent-owned 529 plan each year after the FAFSA is filed to reduce the impact on need-based financial aid eligibility
4. You want to switch from an advisor-sold 529 plan to a direct-sold 529 plan
Families who originally purchased a 529 plan through a financial advisor may want to switch to a lower-cost direct-sold 529 plan. Financial advisors who sell 529 plans are compensated based on the 529 plan’s fee structure. In some cases, upfront sales charges can be as high as 5.75% of assets.
Some parents feel comfortable working with a financial advisor when selecting a 529 plan and allocating investments. However, there are many direct-sold plans that offer age-based investment portfolios that will automatically adjust based on the beneficiary’s age and when they will begin to draw down the funds in the 529 plan account. Age-based 529 plan portfolios typically start out in aggressive investments such as stocks and move toward more conservative fixed income investments over time.
5. Your 529 plan has high fees
In recent years many 529 plans have cut fees by offering lower-cost investment options such as index funds and exchange traded funds (ETFs). There has also been competition among 529 plan providers to try and provide the lowest-cost 529 plan options. If your current 529 plan has not followed this trend, it might be time to look elsewhere.
6. You are unhappy with your 529 plan’s investment performance
529 plans are investment vehicles that go up or down in value based on the performance of the investment options and the overall stock and bond markets. Stock market returns are volatile and will fluctuate, and so will your 529 plan’s performance.
Past performance is not an indicator of future results, but by keeping your funds in a 529 plan that consistently under-performs its benchmark you may be putting your child’s college savings at risk. Families who are risk-averse may consider switching to a 529 plan with more conservative or FDIC-insured investment options.
Families can monitor their 529 plan’s performance by reviewing quarterly statements from the program manager and Savingforcollege.com’s quarterly 529 plan rankings.