Should you switch 529 plans if you move to another state?

Kathryn FlynnBy Kathryn FlynnBy Savingforcollege.com

Families moving to a different state might consider changing their college saving strategy to maximize state income tax benefits. Depending on the state, they may continue to fund an existing 529 plan or redirect new contributions to a 529 plan sponsored by the state they are moving to.

State income tax deductions or credits for 529 plan contributions

Your strategy may depend on the state to which you are moving.

If you are moving to one of the 28 states that offer a state income tax deduction or credit for contributions only to an in-state 529 plan, it may make sense to open a new 529 plan in that state.

If the state has low limits on the annual state income tax benefit, you may want to split your contributions between the two states’ 529 plans. Contribute enough to the new state’s 529 plan to maximize the state income tax benefit and contribute the rest to your existing 529 plan.

Many states limit the incentives they offer to invest in their 529 plans. For example, in New York, only contributions of up to $5,000 per individual ($10,000 for married couples filing jointly) are eligible for the state income tax deduction. The same strategy would apply for states that offered matching grants up to a certain amount.

Seven states - Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania - offer tax incentives for contributing to any state’s 529 plan. if you are moving to one of these states, you may be eligible to claim a state income tax benefit for contributions to your existing 529 plan.


State income tax deductions or credits for inbound 529 plan rollovers

In 18 states, you may be eligible to claim a state income tax benefit for rollover contributions from your existing 529 plan to your new 529 plan.

These states include Alabama, Arkansas, Illinois, Iowa, Maryland, Mississippi, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia, Vermont and Wisconsin. Four of the states – Illinois, New Mexico, Vermont and Wisconsin – limit the tax deduction to the principal portion of the rollover. Arkansas has a lower limit on the tax deduction for rollovers than for new contributions.

Penalties for outbound rollovers

Families who are relocating may be tempted to roll their existing 529 plan funds into a 529 plan sponsored by their new state, even if there isn’t a tax benefit for inbound rollovers. Having just one 529 plan per beneficiary is easier to manage.

The IRS allows one tax-free 529 plan rollover in a 12-month period.

The easiest way to rollover funds is to open a new 529 plan account and complete a rollover distribution form on the existing 529 plan account’s website. You may also take a distribution from your existing 529 plan account and make a rollover contribution to the new 529 plan account.

Rollover 529 plan funds must be moved to the new 529 plan within 60 days, or the distribution will be considered non-qualified. The earnings portion of a non-qualified 529 plan distribution is subject to income tax and a 10% penalty, plus recapture of state tax benefits.

Your state may not follow the federal tax treatment for rollovers. Some states will “recapture” any state income tax deductions or credits previously claimed when 529 plan funds are rolled into another state’s 529 plan. Some states allow a state income tax deduction for inbound rollover contributions from another state's 529 plan.

State

Are outbound rollovers subject to state income tax recapture?

Are rollover contributions eligible for a state income tax deduction or credit?

Alabama

Yes

Yes

Arkansas

Yes

Yes

Colorado

Yes

No

Connecticut

No

No

District of Columbia

Yes

No

Georgia

Yes

No

Idaho

Yes

No

Illinois

Yes

Yes

Indiana

Yes

No

Iowa

Yes

Yes

Maryland

No

Yes

Mississippi

No

Yes

Montana

Yes

Yes

Nebraska

Yes

Yes

New Mexico

Yes

Yes

New York

Yes

Yes

Ohio

Yes

Yes

Oklahoma

Yes

Yes

Oregon

No

Yes

Rhode Island

Yes

No

South Carolina

No

Yes

Utah

Yes

Yes

Virginia

Yes

Yes

Vermont

No

Yes

Wisconsin

Yes

Yes

All other states

No

No

Find your 529 plan - Select your state below

Did you know that residents are not limited to investing in their own state's plan? Another state may offer a plan that performs better and has lower fees. Select your state below to see your state's plan and other options.

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Find a 529 Plan. Select your state below.

Did you know that residents are not limited to investing in their own state’s plan? Another state may offer a plan that performs better and has lower fees. Select your state below to see your state’s plan and other options.



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