When I saw a different 529 plan offered a better investment option, I decided to roll over my 529 plan account to the other plan. The rollover process was very simple.
I opened an account with the new plan online. After I had the account number, I downloaded the rollover form from the new plan. The rollover form asked for the mailing address of the source plan and my account number there. Although it may not be completely necessary, I also downloaded and filled out a distribution form from the existing plan, directing the distribution to the new plan.
I mailed both forms to the new plan. After about 10 days, when I logged into my existing plan account, I saw the money was removed. After another week, the money arrived at the new plan account. The existing plan automatically sent the breakdown between my contributions and the earnings to the new plan. The new plan needs that information when I withdraw in the future.
The previous plan charged $25 for doing the rollover and closing the account, which I was aware of and completely OK with. The better investment option in the new plan will make up for it in no time.
Limit in Frequency
The law sets a limit of maximum one rollover every rolling 12 months (not calendar year). I made a note of the pertinent dates to make sure I don’t violate the frequency limit.
I expect to receive a 1099-Q from the previous plan next January. However, because it was a rollover, I won’t have to report it anywhere on the tax return. From IRS Publication 970 (bold added by me):
Any amount distributed from a QTP isn’t taxable if it’s rolled over to either:
– Another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family (including the beneficiary’s spouse), or
– An ABLE account for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family (including the beneficiary’s spouse). But this doesn’t apply to the extent the amount distributed when added to other amounts contributed to the ABLE account exceeds the annual contribution limit. For more information about ABLE accounts, see Publication 907, Tax Highlights for Persons With Disabilities.
An amount is rolled over if it’s paid to an ABLE account or another QTP within 60 days after the date of the distribution.
Don’t report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040, 1040-SR, or 1040-NR. These aren’t taxable distributions.
If you see a better plan, don’t be scared of the rollover paperwork. It’s very simple.
State Income Tax Benefits Claw Back
If you received state income tax benefits on 529 plan contributions in the past, some states will claw back (“recapture”) the tax benefits when you move your 529 plan account out to another state. By my research, these states will claw back:
- District of Columbia (within two years)
- New Mexico
- New York
- Oklahoma (within one year)
If you’re in one of these states, it’s probably not worth losing the previous tax benefits by moving your 529 plan account. If you received state income tax benefits from these states in the past but you already moved out and you’re no longer filing taxes in these states (not even as a part-year resident), then the clawback doesn’t apply to you.
You have more freedom to choose which 529 plan to use when you’re not in one of the states above. See Using a 529 Plan From Another State Or Your Home State?