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.
Rollover Forms
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.
Tax Form
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:
- Alabama
- Arkansas
- Colorado
- District of Columbia (within two years)
- Georgia
- Idaho
- Illinois
- Indiana
- Iowa
- Nebraska
- New Mexico
- New York
- Ohio
- Oklahoma (within one year)
- Utah
- Virginia
- Wisconsin
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?
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George says
Harry: I agree that it is rather easy to rollover a 529 plan. I rolled my daughter’s from Texas to Schwab (Kansas) last year when Texas changed fund managers and the fees were increased significantly.
If the cash you are investing is just a reasonable portion of cash that is part of a well-thought-out allocation to which you periodically re-balance, then by all means squeeze the last little bit of return out of it.
Otherwise, unless your child is in college or close to starting, If all of your 529 savings are going into cash, you a probably being too conservative. Having saved to put my 4 children through college debt-free, I appreciate why one would be tempted to be conservative. But if children are younger, with a longer time horizon, you don’t want much in cash.
Harry Sit says
George – That’s the bonds portion.
msr says
Harry
An off topic question. Please can you do an article on how to report LTCG / LTCL (with/without them being NQO’s, preferably in TurboTax 🙂
Thanks.
Jas DeWeez says
Harry,
Don’t Virginia residents need to factor in recapture of state tax reductions attributable to deductions of contributions?
Harry Sit says
That’s true but I’m not a Virginia resident.
Denes says
I had been invested in the Vanguard 529 plan through the NC 529 savings plan. However, when NC took away the state tax deduction, I moved my 529 plans to Vanguard to join with my other accounts there (reduced fees!). The paperwork was fairly simple and easy. I did have to add some money to one account to meet Vanguard’s minimums.
Pam says
Thank you for this useful post on 529 rollover.
A slightly off-topic question. I am considering opening a 529 for myself to pay for my classes over a few years.
But if plans change and I do not end up using all the funds in 529 for tuition/fees etc, I will have to pay taxes on the earnings when I withdraw the remaining balance from 529. Does the 529 provider issue a 1099-Q reporting the amount of withdrawl as well as the amount of earnings so that tax payers know exactly what amount is taxable? Or is it up to the taxpayer to determine the amount of earnings from the withdrawl amount?
Thank you.
Harry Sit says
Take a look at the 1099-Q form. There’s a box for earnings.
joe says
My concern with the colorodo plan is there is no fdic insurance with it. Is it worth the risk?
Harry Sit says
Only you can decide whether the risk is worth it. You can get 1.5% with FDIC in the Virginia plan or 3.09% without it in the Colorado plan.
Abc says
It appears that the Colorado plan only has a single investment option – the stable value investment. Is this correct?
If I correctly interpret a comment above, you maintain more than one 529 plan for the same beneficiary. You use the Colorado plan for fixed income investment and you use another plan for stock funds. Correct?
I currently have four 529 accounts with Vanguard’s Nevada plan. I expect that i will probably be opening a few more in the next couple of years. However, I am conconcerned about not having a good paying fixed income alternate to switch funds into as the grandkids get closer to college age. I would like to avoid having multiple accounts for each grandkid, so I am looking for a single plan with low cost index fund and a stable value fund. Do you have any suggestions?
Have you looked at the plan from Merrill Edge? Any thoughts on this plan?
Harry Sit says
That’s correct. The plan has only one investment option. I use this plan only for fixed income. The Ohio plan has CDs. Several other plans have TIAA stable value funds. None of them is as good as this one when it comes to fixed income.
Abc says
Thanks. Any thoughts on Merrill Edge 529 plan.
Harry Sit says
I don’t see anything special about the Merrill Edge 529 plan. The iShares age-based portfolios have low expenses (0.3x%), but not that low. It’s not a bad plan, just not one of the best.
Alex says
I have a Schwab Kansas 529 account for each of my grandkids, due to the market downturn the earnings are no longer thus I was considering rolling them over to Virginia where I reside and can take a tax deduction, the question I have is, can the roll over money be tax deductible to my Virginia Taxes? I realize there is a yearly limit per account. Virginia 529 says no, but my CPA says yes, I am inclined to cash them all out and then make new contributions but I hate to do that, does anyone know the answer? oh, I was never a Kansas resident thus I never benefited there.
Thanks.
Seth says
Does one receive a state tax deduction for rollovers? I would like to roll about 15k in a NH 529 into a CO 529 if I would receive the CO state tax deduction for doing so.
Harry Sit says
I guess it varies by state. Colorado doesn’t allow it.
https://www.colorado.gov/pacific/sites/default/files/Income44.pdf
Sam Rayanna says
Hi Harry
– I have a 529 plan for my daughter as beneficiary
– I am the owner, she is the beneficiary
– She has completed her education, but there are funds still remaining.
– If I change the ownership of the plan to my daughter, will there be any tax consequences?
– My thinking is since this is a completed gift there would not be any tax consequences.
Thanks
Sam
Harry Sit says
No tax consequences but please check with the 529 plan administrator on the required procedure. For example, Utah’s my529 plan uses this form:
https://my529.org/wp-content/uploads/2023/07/2023.5_505-Account-Owner-Change_FILL-IN-2.pdf
Not all 529 plans allow a change of ownership. If the 529 plan allows it, the 529 plan account remains a 529 plan account, subject to all the requirements of a 529 plan account. The beneficiary can be changed to a person of a defined list of relationships to the original beneficiary. Non-qualified withdrawals are subject to tax and penalty on the earnings. Those are still the same regardless who’s the owner.
A new law allows rolling over unused 529 plan money to the beneficiary’s Roth IRA, with its own set of requirements and eligibility. That’s another path you may explore. Changing the owner now may or may not affect the eligibility of this path. It’s a new law and not everything is clear on how it works. You may want to wait until it’s more clear if you’re interested in pursuing this alternative or forget it if you don’t mind keeping the 529 account a 529 account.
Alex says
No tax consequences if ownership transferred. The new owner may withdraw all funds but have to pay the 10% penalty on gains and capital gains on any gains at the new owner rate or… no tax or penalty if kept for future children or for rolling over into an IRA, for the IRA checkbIRS rules for 2023 and 2024 as I can’t recall current laws