Can you transfer funds from custodial accounts to a 529 plan — and vice versa?

You can move money from a custodial account, such as a UGMA (Uniform Gifts to Minors Act) or a UTMA (Uniform Transfers to Minors Act), to a 529 plan. There are two primary reasons to consider doing so. One is taxes. Investment earnings in a 529 grow tax-deferred, and withdrawals, including any earnings, are tax-free when they are used for qualified education expenses. In a custodial account, investment income over a certain threshold may be taxable. The second reason is that 529 assets are treated more favorably from a financial aid perspective than UGMA/UTMA assets. When applying for federal financial aid, since 529 assets are generally considered parental assets, only 5.64% of which are considered when calculating the Expected Family Contribution (EFC), while UGMA/UTMA assets, which are considered the student's assets, are factored in at 20%. (see more below ). 4 There are a few downsides to this shift, however, including potential capital gains taxes on any profits when you sell UGMA/UTMA assets to make the transfer. Plus, when you transfer a custodial account to a 529, you create what's called a custodial 529 account, which has certain restrictions. For one, you cannot change the beneficiary, as you can with a traditional 529 and the beneficiary becomes the account owner upon reaching the age of termination based on the state the UGMA/UTMA was established under. Compare custodial accounts and 529s here.

529 college savings plans: An essential guide

Q: Can you roll over a 529 plan?

Within any 12-month period, IRS rules allow one income tax-free rollover of a single 529 account into another for the same beneficiary. Two reasons you might consider a rollover: You've moved, and your new state offers a tax deduction for contributions to qualifying in-state 529 plans. By rolling the 529 from your old state into your new home state's plan, you can keep new and old contributions together in one account. Or you may have multiple 529s and want to consolidate them to make tracking and managing your savings easier. You cannot, however, roll a 529 plan account into an IRA or any other retirement plan. However, you can also rollover a 529 account into another account for a member of the family of the designated beneficiary.

Q: Could a 529 plan affect financial aid?

The financial-aid formulas used to determine need-based federal grants, loans and scholarships treat assets and income differently, with assets playing less of a role than income does. Parents are typically expected to contribute only 5.64% of assets annually toward college, including 529 plans (but not including retirement savings or the equity in your primary residence). Students are expected to chip in 20% of their assets for college costs, including UTMA and UGMA custodial accounts — making a 529 plan a better savings choice if aid eligibility is a priority. You are not required to report a 529 owned by a grandparent on the FAFSA (Free Application for Federal Student Aid), so those assets don't figure into aid formulas. (Keep in mind, however, that some private colleges use different financial aid forms that may treat 529s differently.) However, a 529 account owned by a grandparent still has the potential to reduce a grandchild's need-based aid eligibility. That's because distributions from the 529 account are considered non-taxable income to the student in the following year when completing your FAFSA, increasing the amount of assets held in their name. It is important to note that there have been recent changes to the FAFSA application over the next couple of years that will eliminate this issue going forward.

Answers to key questions about the tax-advantaged accounts that can help families save for college and other education costs.

The value of a college education may be priceless — but paying for it can be a daunting financial challenge. One tool that can help: a state-sponsored 529 savings plan. Richard Polimeni, managing director, Education Savings Programs for Bank of America, fields the most frequently asked questions about 529s.

Estimate how much to save with the College Planning Calculator.

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What are the benefits of a 529 plan?

A 529 plan provides a tax-advantaged way to invest for college, private elementary and secondary school tuition and expenses, as well as other education-related expenses. The money you contribute to a 529 plan isn't tax deductible for federal income tax purposes, but depending on where you live you may qualify for a state income tax deduction for contributions made to your home state plan (or in some states, any 529 plan). Investments in the 529 account have the potential to grow tax-deferred, and withdrawals, including any earnings, used to pay for qualified education expensesFootnote ¹ are tax-free. Almost anyone can open and contribute to a 529 plan — there are no income restrictions — and 529 contribution limits are high enough to allow families to plan for the rising cost of college.

What counts as a qualified 529 expense?Footnote ¹

Withdrawals from a 529 plan are fully tax-free when used to pay for qualified education expenses. Those generally include anything a student needs to attend an accredited college, university or vocational or technical school that qualifies as an eligible educational institutionFootnote ¹ — tuition and required fees, room and board,Footnote ² books and equipment, and computer expenses, for example. But recent tax legislation has greatly expanded the tax-free uses of 529 to cover a wide variety of education expenses, including:

Up to $10,000 ($20,000 beginning in 2026) per year to pay for tuition and related expenses at an eligible private, religious or public K-12 school. Eligible expenses now include curriculum materials, books, online educational materials, standardize testing fees, tutoringFootnote ⁴ and educational therapies for students with disabilities provided by a licensed provider.
Payments toward student loans of the beneficiary and each sibling of the beneficiary, up to a lifetime maximum of $10,000. This lifetime maximum applies separately to the account beneficiary and each sibling of the beneficiary.
Certain fees and expenses related to the costs associated with participation in a certified and registered apprenticeship program and recognized postsecondary credential programs. Additionally, up to $35,000 (lifetime limit) can be rolled over federal tax-free into a Roth IRA for the 529 beneficiary if certain conditions are met.
While the rules cover a wide range of education costs, some expenses aren't considered qualified. Those include the cost of traveling to and from school, college test prep or entrance exam fees, health insurance purchased through the school and fees for extracurricular activities.

The earnings portion of non-qualified withdrawals is subject to federal and possibly state and/or local income taxes as well as a potential 10% additional federal tax. Additionally, state tax treatment may vary for certain types of 529 withdrawals.

Can you open a 529 account for a grandchild?

Yes, you can open a 529 account for a grandchild. It doesn't matter which state your grandchildren plan to attend school. Before you select a 529 plan, be sure to check for state tax or other state benefits available through your home state or your grandchildren's home state 529 plan.

A 529 can also be an important estate planning tool. You can set up multiple 529 plans for your grandchildren. And, if you set up a 529 plan for one grandchild and that grandchild decides not to use the funds for college, you may be able to change the beneficiary to another grandchild (or certain other members of the original grandchild's family as defined in the Internal Revenue Code without incurring income or federal gift taxes). With a 529 plan, you can also make a contribution of up to five times the annual gift tax exclusion amount in one year and elect on a federal gift tax return to treat the gift as being made pro rata over a five-year period, if certain conditions are met.Footnote ³

Contributions made to a 529 plan are generally considered completed gifts and are not included in your estate for federal estate tax purposes.

Can a child benefit from having more than one 529?

The short answer is yes — a child can be the beneficiary of multiple 529 plans. Why would parents or grandparents want to contribute to separate 529 plans? As noted in the previous question, state tax benefits may come into play if multiple individuals who reside in different states are contributing. Another reason is control: As the owner, the person who sets up a 529 plan can decide how the assets are invested and when distributions should be made. The owner can also change the account beneficiary, something you might want to do, for example, if the original beneficiary no longer needs the funds.

Although most 529 plans provide a diversified mix of investments to choose from, having more than one 529 plan could give you more investment options and access to additional investment managers. While not common, another reason for opening multiple 529s for the same beneficiary: contribution caps. Each state sets maximum contribution limits for their 529 plan, which generally range from $235,000 to over $600,000. The maximum applies to the combined balances of all accounts for the same beneficiary in that state's 529 plan. By opening an additional 529 plan in another state, you might be able to invest more than what your state allows. Please consult with your tax advisor regarding your specific situation.

Can you transfer funds from UGMA/UTMA custodial accounts to a 529 plan?

You can move money from an existing custodial account, such as an UGMA (Uniform Gifts to Minors Act) account or an UTMA (Uniform Transfers to Minors Act) account, to a 529 plan. There are two primary reasons to consider doing so. One is taxes. Any investment earnings in a 529 grow tax-deferred, and withdrawals, including any earnings, are not subject to federal income taxes when they are used for qualified education expenses. In a custodial account, investment income over a certain threshold may be subject to income taxes. The second reason is 529 assets are treated more favorably from a federal financial aid perspective than UGMA or UTMA assets. When applying for federal financial aid, 529 assets are generally considered parental assets, only 5.64% of which are considered when calculating the new Student Aid Index (which replaces the existing Expected Family Contribution), while UGMA/UTMA assets, which are considered the student's assets, are factored in at 20% for purposes of the federal financial aid calculation. (See more below).Footnote ⁴

There are a few things to keep in mind when considering this shift, however, including potential capital gains taxes on any profits when you sell UGMA or UTMA assets to make the transfer. Plus, when you transfer a custodial account to a 529, you create what's called a custodial 529 account, which has certain restrictions. For one, you cannot change the beneficiary as you can with a traditional 529, and it is your obligation to turn the assets over to the designated beneficiary when they reach the termination age based on the law of the state under which the UGMA or UTMA account was established.

Compare custodial accounts and 529s.

Can you roll or transfer one 529 plan to another?

Within any 12-month period, IRS rules allow one tax-free rollover of a single 529 account into another 529 account for the same beneficiary. You might consider a rollover if you've moved, and your new state offers a tax deduction for contributions to qualifying in-state 529 plans. By rolling the 529 from your old state into your new home state's plan, you can keep new and old contributions together in one account. Or you may have multiple 529s for other reasons and want to consolidate them to make tracking and managing your savings easier. You can also roll a 529 account into another 529 account for a member of the family of the designated beneficiary.

Could a 529 plan affect financial aid?Footnote ⁴

The financial aid formulas used to determine need-based federal grants, loans and scholarships treat assets and income differently, with assets playing less of a role than income. Parents are typically expected to contribute only 5.64% of assets annually toward college. Assets include most savings and investments, including 529 plans, (but excludes retirement savings, the equity in your primary residence and the cash value of life insurance and annuities). As a result, 529 assets are treated like other parental assets and have a minimal impact on financial aid.

In contrast, students are expected to chip in 20% of their assets for college costs, including UTMA and UGMA custodial accounts — making a 529 plan a better savings choice if aid eligibility is a priority. As of the 2024-25 school year, you are not required to report a 529 owned by a grandparent on the FAFSA (Free Application for Federal Student Aid), so those assets won't figure into aid formulas. (Keep in mind, however, that some private colleges use different financial aid forms that may treat 529s differently.)

Financial aid rules may change, and the rules in effect at the time the beneficiary applies may be different. For more information on federal aid, please go to the Department of Education's website at www.ed.gov.

What happens to a 529 if all the money isn't used?

If your child doesn't go to college or doesn't need all the 529 funds, perhaps due to scholarships, you have a few options for using your investment. One is to transfer or roll over the 529 account to a new beneficiary. In order for the rollover to be federal tax-free, the new beneficiary must be a member of the original beneficiary's family, such as siblings (including stepsiblings), parents, spouse, children, first cousins, nieces and nephews, and the new beneficiary cannot be in a lower generation than the original beneficiary (or it will be considered a new gift for federal gift purposes). You can also name yourself as a beneficiary (assuming you are a family member of the original beneficiary and are in the same generation or an older generation) and use the funds for your own education or training, either in your current career or to begin a new one. This strategy isn't possible, however, for UGMA/UTMA custodial funded 529 accounts — as that beneficiary designation is irrevocable. Qualified individuals can also roll over a 529 into an ABLE account (a tax-advantaged savings account that benefits those who are disabled), subject to ABLE annual contribution limits.

There aren't any distribution deadlines on 529 account assets, so assets can remain in an account to be used later, for example, to fund the beneficiary's qualified expenses for graduate or other schooling.

You may also close the account and take a non-qualified withdrawal. In that case, federal income taxes, state and local income taxes, and the potential additional 10% federal tax on the earnings portion of the withdrawal will apply.

If your child receives a tax-free scholarship, fellowship grant or attends a U.S. military academy, you may withdraw an amount equal to the scholarship/grant (or the costs of advanced education attributable to attendance at the military academy) from the 529 account without having to pay the 10% additional federal tax; you will owe only the federal ordinary income taxes on the earnings portion of the withdrawal. State and local income taxes may also apply. The 10% additional tax also does not apply if the beneficiary dies or becomes disabled.

Finally, you can roll over 529 assets to a Roth IRA for the beneficiary if the 529 account has been open for at least 15 years and meets certain other criteria (annual and lifetime contribution limits apply).

Next steps

Use the college savings guide to help you develop a game plan to fund college
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Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Before you invest in a Section 529 plan, request the plan's official statement from your Merrill Financial Solutions Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection from creditors that are available only for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.
Footnote ¹ You can take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at an elementary or secondary public, private or religious school. Starting in January 2026, the expense limit is being increased to $20,000 per calendar year. To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a Section 529 account, such withdrawal must be used for "qualified higher education expenses" as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax as well as applicable state and local income taxes. The additional tax does not apply under certain circumstances. Qualified higher education expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance of the beneficiary at an eligible educational institution; certain room and board expenses; special needs services incurred in connection with enrollment or attendance at an eligible educational institution; and computers or peripheral equipment, computer software, or internet access and related services that are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. Due to new legislation, the expanded K-12 use now includes curriculum materials, books, online educational materials, tutoring, standardized test fees, dual enrollment fees, therapies for students with special needs, and certain postsecondary credentialing expenses. The beneficiary must be attending an eligible educational institution at least half-time for room and board expenses to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs to be eligible educational institutions. Some foreign institutions are eligible. Qualified higher education expenses include expenses for fees, books, supplies and equipment required for the participation of a beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the beneficiary or sibling of the beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the beneficiary will count toward the lifetime limit of the sibling, not the beneficiary. Such repayments may impact student loan interest deductibility. State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school; apprenticeship expenses; and payment of qualified education loans.

Footnote ² The beneficiary must be attending an eligible educational institution at least half-time for room and board to be considered an eligible expense.

Footnote ³ With proper reporting, contributions during 2025 between $19,000 and $95,000 ($38,000 and $190,000 for married couples) made in one year can be prorated over a five-year period without subjecting you to federal gift tax or reducing your federal unified estate and gift tax credit. If you contribute less than the $95,000 ($190,000 for married couples) maximum, additional contributions can be made without you being subject to federal gift tax up to a prorated level of $19,000 ($38,000 for married couples) per year. Federal gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $19,000 and $95,000 ($38,000 and $190,000 for married couples) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in their estate for federal estate tax purposes. Note that the classification of property contributed by a married couple as community or separate will impact how such contributions are reported on the federal gift tax return. Please consult your tax and/or legal advisor for guidance before moving forward with accelerated contributions.

Footnote ⁴ This is based on current interpretation of federal financial aid rules. Financial aid rules may change, and the rules in effect at the time the beneficiary applies may be different.

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