You can transfer funds in a 529 plan from one state to another through a direct rollover from the old 529 plan to the new 529 plan. You can also transfer the 529 college savings plan through a distribution-contribution combination. But, there are a few pitfalls you will need to avoid penalties from the outbound state’s plan or for making a non-qualified withdrawal.
Do You Really Need to Transfer Your 529 Plan?
Even if you’ve moved to a new home state, you might not need to transfer your 529 plan to an in-state plan.
You can keep the money in the old state’s plan. You can use a 529 plan to pay for college in any state.
If you want to take advantage of a state income tax deduction or tax credit on contributions to the new state’s 529 plan, you can open a new 529 plan in the new state and direct new contributions to the new account, and receive the state tax benefits.
Some states provide a state income tax break on contributions to any state’s 529 plan. These states include Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio and Pennsylvania.
Even though you don’t explicitly need to transfer your 529 plan to another state, you may still want to for various reasons, like better investment options or lower fees. Before you do, make sure you avoid the penalties and pitfalls.
Check for Penalties and Pitfalls before You Transfer 529 Plans
There are no federal income tax consequences to a rollover for account owners, but some states treat outbound rollovers as non-qualified distributions.
If so, you may have to pay state income tax on the earnings portion of the rollover. There may also be recapture of any state income tax breaks attributable to the distribution.
The states that penalize outbound rollovers include Alabama, Arkansas, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Rhode Island, Utah, Virginia, Washington DC, and Wisconsin.
According to IRS regulations, you can perform one tax-free rollover per beneficiary every 12-month period.
If you transfer the money by taking a distribution from the old 529 plan, you must contribute it to the new 529 plan within 60 days.
Look for State Income Tax Breaks on Inbound Rollover Contributions
Some states provide a state income tax deduction or tax credit on inbound rollover contributions.
These states include Alabama, Arkansas, Illinois, Iowa, Maryland, Mississippi, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, South Carolina, Utah, Vermont, Virginia and Wisconsin.
Of these states, Illinois, New Mexico, Vermont, and Wisconsin provide the state income tax break on the principal portion of the rollover only.
Two Methods of Moving a 529 Plan
There are two methods of transferring a 529 plan to a different state.
Option 1: Direct Rollover
One method of transferring 529 plans involves a direct rollover from the old 529 plan to the new 529 plan.
Follow these steps:
- Open a 529 plan account in the new state if you don’t already have one.
- Download a rollover form from the website of the new state’s 529 plan.
- Enter the account numbers for the old 529 plan and the new 529 plan.
- You may need to get a Medallion Signature Guarantee on the form, depending on the 529 plans.
- Attach a copy of the latest statement from the old 529 plan.
- Mail the form and attachments to the new 529 plan.
Option 2: Take Distribution and Make Contribution to New Plan
The other method of transferring 529 plans involves taking a distribution from the old 529 plan and contributing the money to the new 529 plan.
- The contribution must occur within 60 days of the distribution.
- The new 529 plan will want to know how much of the distribution from the old 529 plan was principal and how much was earnings.
- In most cases, the account owner must provide the new 529 plan with a copy of the most recent statement from the old 529 plan.
- If you aren’t careful, the transfer will be treated as a nonqualified distribution from the old 529 plan and as a new contribution to the new 529 plan, leading to income taxes, tax penalties, and gift taxes.
Moving your 529 college savings plan from one state to another can be tricky, but it’s possible. You don’t have to switch your plan even if you move to a new state. There are benefits, like tax breaks, if you do it right. However, always be careful to avoid any extra fees or penalties.