Can I Move a 529 Plan From One State to Another?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs, with funds that can be used for qualified higher education expenses at eligible institutions across the country. Account owners often ask if these funds can be moved from one state’s plan to another. You can transfer your 529 plan funds through a process known as a rollover. This allows you to move your existing education savings into a new 529 plan, which can be particularly useful if you move to a new state or find a plan with better features.

Key Considerations Before a Rollover

Before initiating a rollover, evaluate the state tax implications. Many states offer a state income tax deduction or credit for contributions made to their own 529 plan. If you roll funds out of such a plan, you will likely lose the ability to claim this tax benefit on future contributions. Conversely, moving to a new state and rolling your funds into that state’s plan could make you eligible for their specific tax deductions or credits.

The potential for recapture taxes is another consideration. Some states that provide an upfront tax deduction for 529 contributions may require you to pay back those tax savings if you later roll the money into another state’s plan. This “recapture” is treated as state taxable income in the year of the rollover. Check the rules of your current plan’s state to see if they impose recapture taxes on outbound rollovers.

You should examine the fee structures of both your current plan and the prospective new plan. These can include annual account maintenance fees, administration fees, and the expense ratios of the underlying investment options. Even small differences in fees can compound over time, impacting your total savings.

Each 529 plan offers a unique menu of investment options, with a range of mutual funds that have varying allocations of stocks and bonds. You should review the investment choices in the potential new plan to determine if they better align with your risk tolerance and long-term financial goals for the beneficiary’s education.

Required Information for a 529 Rollover

To prepare for a rollover, you must gather specific details about your existing 529 account. This includes the full account number, the name of the beneficiary, and the name and mailing address of the current plan administrator. A recent account statement is useful, as it will contain most of this information and the breakdown between your contributions and earnings.

Before you can move funds, you must open an account with the new 529 plan. The application process will require personal information for both the account owner and the designated beneficiary. Be prepared to provide full names, physical addresses, dates of birth, and Social Security Numbers or Taxpayer Identification Numbers for both individuals.

The rollover request form is obtained from the new plan administrator, not the old one. This form can be downloaded from the new plan’s website or requested from their customer service department. It will ask for the details you gathered about your existing account, authorizing the new plan to request the funds on your behalf.

The 529 Rollover Process

The most common method for moving funds is a direct, or trustee-to-trustee, rollover. In this procedure, you submit the completed rollover form to your new 529 plan administrator. The new plan then contacts your old plan administrator and coordinates the transfer of assets directly between the two institutions. This method is seamless for the account owner, avoids potential tax mishaps, and ensures the transaction is properly coded as a tax-free rollover.

An alternative is the indirect rollover, which carries more risk and responsibility for the account owner. With this method, you first request a withdrawal from your old 529 plan. The plan administrator will send you a check for the account balance. You then have a strict 60-day window to deposit the entire amount into the new 529 plan.

Failing to deposit the funds within the 60-day deadline will cause the entire withdrawal to be treated as a non-qualified distribution. This means the earnings portion of the withdrawal would be subject to federal income tax and a 10% penalty. Furthermore, federal regulations limit an account beneficiary to one such rollover in any 12-month period; exceeding this limit would also trigger taxes and penalties.

Rollovers to a Roth IRA

A provision of the SECURE 2.0 Act introduced another option for unused 529 funds. Account owners can now roll over money from a 529 plan to a Roth IRA for the plan’s beneficiary, free of taxes and penalties. This can be a strategy if the beneficiary does not need all the funds for education.

This type of rollover is subject to several conditions:

• The 529 account must have been open for at least 15 years.
• The specific funds being moved must have been in the account for more than five years.
• There is a lifetime maximum of $35,000 that can be moved per beneficiary.
• The amount rolled over in a single year is capped by the annual Roth IRA contribution limit for that year.

Tax Reporting for a 529 Rollover

After completing a rollover, you will receive tax documentation from your old plan administrator. Specifically, you will be sent Form 1099-Q, titled Distributions From Qualified Education Programs. This form reports the total amount of the distribution from your old account. Receiving this form is standard procedure and does not automatically mean you owe taxes.

When you file your federal income tax return, you must properly report the rollover to ensure it is not treated as a taxable event. The gross distribution amount shown on Form 1099-Q is reported on your tax return. You will then indicate the amount that was rolled over into a new qualified tuition program. If the entire distribution was successfully rolled over according to IRS rules, the taxable amount will be zero, ensuring no income tax or penalties are assessed.