Dear Dr. Don,
As Florida residents, we already have 529 plans to save for college for both of our children. With the significant reduction in the Florida prepaid tuition price, we are wondering if we can transfer the funds from the 529 plans and purchase the Florida prepaid tuition plan for each child. The funds in each of their accounts will completely cover the cost if we purchase the plans now. It seems very tempting. Do you think we should move forward on this?
— Lori Long-Term
You can perform a rollover from a 529 college savings plan to a 529 prepaid tuition plan with no tax consequences if the rollover is performed correctly. The name for 529 plans is based on the section of the U.S. tax code defining such plans. Within the code, these plans are called qualified tuition programs, or QTPs.
IRS publication 970, Tax Benefits for Education, states: “Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the beneficiary’s family (including the beneficiary’s spouse). An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution.”
There are limitations. The publication cautions, “If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary.”
What about the changes made by Florida? According to the Florida Prepaid College Board, “The dramatic reduction in prices is tied directly to the new law created by House Bill 851 and the fact that it reduces the maximum annual increase of the tuition differential fee to 6 percent for pre-eminent state universities and zero percent for all other state universities. Previously, the tuition differential fee could increase by up to 15 percent annually at all state universities.”
Prepaid plans will be available for purchase during the open enrollment period, Oct. 15, 2014, to Feb. 28, 2015. You didn’t mention your children’s ages, the balances in their tuition plans or which of the five Florida prepaid plans you’re considering. So, it is difficult for me to evaluate whether your decision to transfer to one of these plans is right for you and your children.
If, after reviewing the master contract and pricing, you aren’t certain that it’s the right choice, then work with a financial-planning professional to work through the decision-making process.
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