Transferring College Savings Between Students
2021 – 09/21 by Deborah Carroll
We ran into a dilemma in funding college for our children. Perhaps our experience will help you assess your own college spending options.
We have two kids, each with a Texas Guaranteed Tuition Plan. Child 1 is done with school but has leftover hours in the plan, prepaid tuition credits she won’t be using. Child 2 is in school and we could use some extra funding for her to finish up.
Our question was this: How do we transfer the leftover funds from Child 1 to Child 2 without causing a taxable event and incurring a 10% withdrawal penalty?
Let’s start with some background. (Because all of this is fairly complicated and regulated by state rules, we’ve included several links for additional details.)
What is a Qualified Tuition 529 Program?
529 Programs allow taxpayers to make contributions to be used to pay qualified education expenses. They provide a great way to prepare for future college costs. There are two program types in Texas.
- Prepaid tuition credits for a designated beneficiary. Texas Guaranteed Tuition Plan and The Texas Tuition Promise Fund
- Savings account contributions to be used to pay for qualified education expenses. Texas College Savings Plan and LoneStar 529 College Savings Plan
What are qualified education expenses?
- Tuition and fees
- Books and supplies
- Computers, software, and internet access
- Click here for a complete list from the IRS.
What are the rollover rules?
There are many circumstances where tuition credits or college savings might not be fully used by the original beneficiary, such as our Child 1. Using them for non-qualified expenses incurs a 10% withdrawal penalty. Fortunately, the funds will not go to waste or incur the penalty if someone else in the family needs them. Here are the basic rules on rollovers.
- Tax-free rollovers are allowed into an education savings accounting for the beneficiary or other family members.
- One rollover is allowed during a 12-month period.
- The rollover must be completed within 60 days after the date of withdrawal.
- Family members include siblings, first cousins, parents, etc. (not a complete list).
- Click here for IRS guidance
What were our options in this situation?
We had surplus tuition credits for Child 1 in a Texas Guaranteed Tuition Plan. Our options to move this benefit from Child 1 to Child 2 were to:
#1. Rollover the funds within the Texas Guaranteed Tuition Plan. This is essentially a change of beneficiary to Child 2 for the existing account. This would only be an option if Child 2 were under the age of 18. (Texas prepaid Higher Education Tuition Board, Change of Beneficiary)
#2. Rollover the funds to a Texas College Savings Plan or LoneStar 529 College Savings Plan for use by Child 2.
We chose option #2 because:
- Child 2 is over 18.
- The rollover rules are met (no taxes).
- The money will be utilized for room, board, books, and supplies (no 10% penalty).
- It allows us to use our initial investment and dividends for its original purpose (funding education).
With multiple options and rules, 529 accounts can be confusing. But they provide a great way to save for education costs. And for families with more than one student, mechanisms are available to move funds from one learner to another (and not just siblings). Tax penalties may apply if rules are not followed carefully, so feel free to reach out to your Bland Garvey tax professional who can fully describe your options and responsibilities.