During our webinar about How to Reach Your College Savings Goals with a 529 Plan, participants asked dozens of questions. Here are the answers to questions about having a 529 plan in a different state and moving a 529 plan between states.
Questions about Moving to a Different State
I am a consultant and keep moving across the states for job purpose. If my son ends up going to a school in Illinois but my 529 is from Ohio what are the pros and cons?
You can use a 529 plan from any state to pay for an eligible college in any state. For example, you can use a 529 plan from Ohio to pay for college in Illinois. So, you don’t need to move your existing 529 plan to another state.
You might, however, wish to direct new contributions to the new state’s 529 plan to take advantage of the state income tax breaks on contributions to the state’s 529 plan. State income tax breaks are generally limited to the 529 plan for the state of residence, although seven states provide their state income tax breaks for contributions to any state’s plan.
About half of the states with a state income tax deduction or tax credit based on contributions provide the state tax break on inbound rollovers in addition to cash contributions. However, about the same number of states treat an outbound rollover as a non-qualified distribution, leading to state income taxes on the earnings portion of the distribution and possible recapture of state income tax breaks.
Some states provide special financial aid benefits for students who have a 529 plan in the state, such as not counting the 529 plan as an asset when determining eligibility for state grants and other state aid.
If I relocate to a different state, am I obliged to terminate or change the 529 plan? Will there be any change to the 529 terms upon relocation?
You are not required to change or terminate your 529 plan if you move to another state. You can keep the 529 plan in the same state.
The main difference is that you will no longer be able to claim a state income tax deduction or tax credit based on contributions to the previous state’s 529 plan. (There are, however, seven states that provide a state income-tax break for contributions to any state’s 529 plan: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania.)
But, nothing stops you from directing new contributions to a new 529 plan in your new state, and keeping the old 529 plan where it is.
You could rollover the old 529 plan to a new 529 plan in the new state. However, some states treat an outbound rollover to another state as a non-qualified distribution, which would result in state income tax on the earnings portion of the rollover, plus possible recapture of the state income tax breaks previously received. On the other hand, some states provide a state income tax deduction or tax credit based on rollover contributions from another state’s 529 plan.
Questions about Opening a 529 Plan in Another State
If I live in New Jersey, can I open an account let’s say in Ohio 529?
Yes, you can open a 529 plan account in most states other than your own, not just your own state.
There are a handful of states where direct-sold 529 college savings plans are available only to state residents, namely Florida, Louisiana, New Jersey, South Carolina, South Dakota and West Virginia. The Connecticut advisor-sold plan is available only to state residents. Most prepaid tuition plans are limited to state residents.
State income tax deductions and tax credits are available only if you invest in your own state’s 529 plan, except if you live in Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana or Pennsylvania, where the state tax break is available for contributions to any state’s 529 plan.
When the child is young, it may be better to invest in a low-fee 529 plan from another state, even if your own state provides a state income tax break on contributions. When the child enters high school, the state income tax deductions and tax credits may be worth more than the lower fees on an out-of-state 529 plan.
Questions about Using a 529 Plan from another State
Do any of the 529 plans require students to attend schools in the state they originate from, or even if we go for a 529 plan in say Ohio, is the student free to choose schools anywhere?
There are no restrictions on the colleges the student can attend, so long as the college is eligible for Title IV federal student aid. There are more than 6,300 eligible colleges, including more than 400 foreign colleges and universities, including more than 10 colleges in each of Canada, Mexico, England, Scotland, Australia, France and Ireland.
Questions about Transferring a 529 Plan between States
Can I transfer a 529 plan form one state to another 529 plan from another state?
Yes, but if you are rolling over a 529 plan from one state to another, you may have to pay state income tax on the rollover and repay state income tax deductions or tax credits that were claimed in the old state. Some states consider outbound rollovers to be a non-qualified distribution. You should check with your plan on the rules, as they vary by state.
Can a 529 be transferred between states? For example, transfer a Louisiana 529 plan to Ohio? Are there any tax issues or other gotchas when you move a 529 plan to another state?
Yes, a 529 plan can be transferred between states. A rollover is not taxable at the federal level, but may be taxable at the state level.
Some states treat an outbound rollover as a non-qualified distribution. This can lead to taxes on the earnings portion of the 529 plan rollover. It can also involve recapture of the state income tax breaks attributable to the rollover in about half of the states with state income tax deductions and tax credits.
On the other hand, about half of the states allow a state income tax deduction or tax credit on inbound rollovers from an out-of-state 529 plan. In four of the states, the state income tax break is limited to the principal portion of the rollover only.
If my child doesn’t go to a college in a state where I opened the 529 account, can I transfer the account to the state where the college is?
You can transfer a 529 college savings plan to another state. This is called a rollover.
It is not necessary to rollover a 529 plan to the state where your child’s college is located, since 529 plans can be used to pay for college in any state.
There are also potential problems with transferring a 529 plan to another state’s 529 plan. Some states consider an outbound rollover to a different state’s 529 plan to be a non-qualified distribution. The earnings portion of the outbound rollover will be subject to income tax on state income tax returns, but not federal income tax returns. There may also be recapture of state income tax benefits attributable to the distribution.
Generally, state prepaid tuition plans can be used to pay for college in the state. However, the prepaid tuition plan can be rolled over into a 529 college savings plan, and then used to pay for college out-of-state.