Prepaid 529 plans can be transferred from one sibling to another.
With the cost of college rising higher each year, it is never too early to start saving for a child's higher education. One way to prepare for the expense and receive a tax break at the same time is to open a prepaid 529 college savings plan. The money grows tax-free and all withdrawals made for college costs also are tax-free. But if the child designated as the beneficiary of the prepaid 529 plan receives a scholarship and does not need the money for college costs or decides not to go to college, the owner of the account has the option of changing the beneficiary to another sibling.
Prepaid 529 Plans
Prepaid 529 college savings plans are run by individual states. Capital gains on the accounts are not taxed by the federal government and are usually not taxed by state or local governments. The federal government does not allow tax deductions for 529 plan contributions, but as long as the money is used for educational expenses, all the withdrawals from the account are tax free. If the owner of the account decides to liquidate the account without using it for college costs or makes withdrawals for anything other than qualified higher education expenses, the interest on any funds taken out would be subject to federal and state income taxes and a 10 percent federal tax penalty.
Portability Between Family Members
Prepaid 529 plans not only allow the account owner to change the beneficiary from one sibling to another, it can be transferred to other family members as well. The account can be designated to the beneficiary's spouse, first cousins and children. The account owner can also change the designation to his or her own nieces, nephews or their spouses. A parent could open a prepaid 529 plan even before a child is born by designating himself as the beneficiary and transferring that designation to the child later.
Portability Between States
Prepaid 529 plans also can be transferred between states. Once every 12 months, you are allowed to roll the money saved in a 529 plan to another state's program. That means if you relocate to Maryland after you've been investing in a 529 plan in the state of Florida, you could move the money from Florida to the 529 plan offered in Maryland without being penalized.
Portability Between Investments
You have the option to move the money between different investments with no capital gains tax consequences, which you can't do with regular investment accounts. You can invest more aggressively for a higher rate of return when the beneficiary is young and switch to more conservative investments as the student gets closer to college-age in order to lower the risk of losing capital.
Tags: Portability Between, college costs, account owner, college savings, designated beneficiary, federal government, from sibling