Tax Facts

690 / Can a distribution from a qualified tuition program be rolled over into another account tax-free?

Editor’s Note:

The 2017 Tax Act now permits Section 529 plan funds to be rolled over into an ABLE account for the designated beneficiary, or the designated beneficiary’s family member, in an amount up to the annual 529 plan contribution limit (rollovers would offset other contributions made to the ABLE account for the year). Amounts rolled over in excess of the limitation are included in the distributee’s gross income. These rules are effective for rollovers that occur after December 31, 2017 and before December 31, 2025. See Q 386 to Q 389 for a discussion of the ABLE account rules.1

Any portion of a distribution transferred within 60 days to the credit of a “new designated beneficiary” (see below) who is a “member of the family” (see below) of the designated beneficiary, is not includable in the gross income of the distributee. (In other words, a distribution generally can be “rolled over” within 60 days from one family member to another.)2 Additionally, if a new beneficiary is a member of the old beneficiary’s family, a change in designated beneficiaries with respect to an interest in the same qualified tuition program will not be treated as a distribution.3 A transfer of credits (or other amounts) for the benefit of the same designated beneficiary from one qualified tuition program to another is not considered a distribution; however, only one transfer within a 12-month period can receive such rollover treatment.4

Generally, a member of the family is an individual’s (1) spouse, (2) child or his descendant, (3) stepchild, (4) sibling or step sibling, (5) parents and their ancestors, (6) stepparents, (7) nieces or nephews, (8) aunts and uncles, or (9) in-laws, (10) the spouse of any of the individuals in (2) through (9), and (11) any first cousin of the designated beneficiary.5 A designated beneficiary is (1) the individual designated at the beginning of participation in the qualified tuition program as the beneficiary of amounts paid (or to be paid) to the program; (2) in the case of a rollover of a distribution or change in beneficiaries within a family (as described above), the new beneficiary; and (3) in the case of an interest in a qualified tuition program that is purchased by a state or local government (or its agency or instrumentality) or certain tax-exempt 501(c)(3) organizations as part of a scholarship program, the individual receiving the interest as a scholarship.6

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