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Move money from loser 529 to new plan

03/09/2009

QUESTION:
Dear Joe,

My New York 529 plan is invested in aggressive growth funds, (and) the balance went aggressively down. They won't allow a transfer of the existing funds into a different fund. Can I withdraw the funds and transfer into another plan with a safer fund?

-- EJ

ANSWER:
Dear EJ,
Unless you have already made two investment changes in 2009, I see no reason for you not to be permitted an investment change in your current 529 account. The New York 529 plan has several investment options from which to choose, ranging from aggressive to conservative, and the longstanding rule of the IRS is that you may switch your investment among those options once per calendar year. A special rule for 2009 allows two investment changes in this year only.

I suggest you call the plan's toll-free number, (877) 697-2837, and inquire further. It's likely there was a misunderstanding initially. Alternatively, log in to your account online and electronically request an investment change.

Another route would be to transfer from your current 529 plan to another 529 plan through a "rollover." A qualifying rollover is not a distribution for federal tax purposes, and your original cost basis carries over to the new 529 plan. You are limited to one rollover per beneficiary in any 12-month period. Although this may be a great strategy for accounts that have gained in value, you may instead want to consider liquidating your "underwater" 529 account and claiming the loss as a miscellaneous itemized deduction on your 2009 taxes.

If you are a New York resident, you must have claimed a deduction on your state income tax returns for at least some of the contributions you made to the New York 529 plan. If you take a nonqualified distribution now or roll over to another 529 plan, New York state recaptures the tax benefit by requiring that you report prior deductions as income on this year's New York tax return. For this reason alone, you are probably better off staying in the New York 529 plan and making whatever investment changes you believe are best.

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