Opening a 529 plan can be a hugely beneficial move for families looking to save up for their child’s college education. Considering the unique tax benefits, the flexible investment options, and the wealth of plans to choose from, it’s no wonder why 529 plans have become so popular with families from every walk of life, but as with any powerful financial tool, there are a few limitations meant to keep these accounts from being abused. One of the most basic limits that pertain to 529 plans applies to changing the investments in a plan: You can only do so a certain number of times without incurring a penalty or simply having the change denied by the plan administrator. So, you’re probably wondering, how many times per year can you change the allocation of a 529 portfolio? To find out, keep reading as the experts at Sootchy explain.
Limits on Changing Fund Allocations with a 529 Plan
As with other types of financial accounts, 529 plans allow for a variety of investments, with some plans – depending on the state – offering more options than others. Within the bounds of a particular plan, you’ll be able to choose either an age-based option, which changes how funds are allocated as the beneficiary gets older, and a static option, which won’t change unless the account owner does so themselves.
With an age-based portfolio, fund allocations can change from year to year with no limit, since any change will happen automatically. A static portfolio, on the other hand, does face limitations in terms of how often you can change your investments. Below, we’ll look at the nature of these restrictions, including how they apply in different circumstances.
Changing Allocations for Existing Funds
When discussing restrictions to investment allocation changes for 529 plans, it’s important to distinguish between changes made to preexisting funds in the account and changes to how future contributions are handled. In the first of these scenarios, the account owner can only change the allocation of their 529 portfolio up to two times per year. However, there is one notable exception to this rule that may allow you to make more than two changes; we’ll cover that loophole in the next section.
Changing Allocations for New Funds
Rather than shifting the allocation of your current funds, you might want to know whether you can simply keep that money where it is and change how future contributions are invested instead. The good news is that you can redirect future investments as many times as you’d like without penalty, so even if you have to wait until next year to reallocate your old funds into a new portfolio, you can start on that updated investment strategy with your next contribution.
Can You Get Around the Limits on Changing Fund Allocations?
Although the rules governing how many times per year you can change the allocation of a 529 portfolio may seem strict, know that they were increased only a few years ago – from once a year to twice – and are likely to increase again in the not-too-distant future. Even if that doesn’t happen, though, you can likely still circumvent the two-per-year rule by adding a step to the reallocation process. In essence, all you need to do is to request a beneficiary change along with your investment change, and any reallocation of funds won’t count toward your limit.
Generally speaking, there’s no penalty for changing the beneficiary of your 529 portfolio, as long as the new beneficiary is a family member (as recognized by the Internal Revenue Service). The list of people who can become the new beneficiary of your 529 plan without issue includes:
• Your spouse
• Your sibling or step-sibling
• Your father/mother or stepfather/stepmother
• Your child or their descendant, whether biological, fostered, or adopted
• Your in-laws (father/mother, brother/sister, or son/daughter)
• Your aunt or uncle (or their spouse)
• Your first cousin (or their spouse)
• Your nephew or niece (or their spouse)
In addition to the list of relatives above, you can choose to change the beneficiary of your 529 plan to anyone else, but picking someone not recognized as a family member by the IRS will mean getting hit with incomes taxes (at both the state and federal levels, most likely) as well as a 10% penalty on the earnings in the account. If you’re in dire need of an investment change, maybe this expense is worth it, but it’s certainly something you should keep in mind when considering a reallocation of funds.
To change the beneficiary of your 529 plan, you’ll need to either download the appropriate form from your plan’s website or request the form from your plan’s administrator. Once you have it, be prepared to provide the account number, contact information for the account owner, the names and Social Security Numbers (or Individual Taxpayer Identification Numbers) of the old and new beneficiaries, as well as a few other details – not least of which is your instructions for the new allocation of the plan’s funds.
Open or Manage a 529 Plan with Help from the Experts at Sootchy
Whether you’re new to 529 plans or could use a helpful tool for managing an existing account, the Sootchy app has what you want. Our service makes it simple to open a 529 plan, manage the details of your plan, and even allows for easy contributions from friends and family. Learn more about the benefits of 529 plans and how we can help by visiting us online or downloading the Sootchy app today.