Can you transfer 529 B accounts from one state program to another?
529 b College Savings Plans have Many Attractive Features
So called 529 B College Savings plans are part of a program that allows people to save money for a child's college education and have the income from the savings grow tax free (that is free of Federal Income Taxes).
529b College Plans are similar to Individual Retirement Accounts (IRA) in that they allow people to save and invest money for a specific purpose (in this case a college education for a child) without having to pay income taxes on the income generated by the investments in the account.
This allows all income generated to be reinvested and the resulting compounding is what allows a person generate the cash needed to put a child through college.
Some Attractive Features of 529b Plans
- The plans are sponsored by the individual states - while some are managed by a state, most are managed by investment companies selected by a state for this purpose. Individuals can invest in a plan offered by any state and neither the investor nor the student beneficiary are required to be a resident of the state sponsoring the plan. Further, the student can attend college, in any state and is not limited to a college in the state sponsoring the plan.
- Some, not all, states offer incentives to their residents to invest in a plan sponsored by the state. The incentives are usually in the form of state income tax deductions or credits for funds deposited into the account (like Roth IRAs, there is no Federal Tax Credit or Deduction for deposits to the account but the income is allowed to grow tax free).
- Other incentives may include scholarships or tuition breaks at local state colleges for residents investing in the state sponsored fund. Withdrawals for allowable college expenses (tuition, room, board, books) incurred in the same year as the withdrawal are free of any income tax liability (federal and state).
- While the beneficiary of the account is the student, the person investing in the account remains the owner of the account. This is important because it allows the parent or other person who opened the account to maintain control of the money thereby preventing the student from taking control upon reaching age 18 and spending it on something other than college. The owner does have the ability to change the beneficiary at will or keep the money for themselves (however, if the money is withdrawn for any reason other than qualified college expenses the income generated by the account is subject to a 10% tax penalty PLUS is added to the person's income for tax purposes in the year it is withdrawn).
- The owner can also put one child through college and then change the beneficiary to another child (their own child, a grandchild, niece, nephew, etc.) and use the remaining funds for that child's education thereby avoiding penalties.
- While states may put limits on how much can be contributed to their plans, there does not seem to be any contribution limits for Federal Income tax purposes other than the $25,000 per child per year threshold for gift taxes (gifts of money or other property in excess of $25,000 per person per year are subject to a "gift tax" as transfers in excess of this amount are assumed to be attempts to avoid estate and inheritance taxes by disposing of one's estate before death).
- There also is no specified limit on how many 529 B accounts one individual can open for the same student. However, if the student isn't able to use all of the funds for qualified college education expenses the 10% penalty and taxes on the income that remains in the account will apply.
Consider Possible Tax Consequences Before Transferring a 529b Plan
As to the specific question regarding whether a 529b account can be transferred from one state plan to another, the answer is YES. You are allowed to transfer funds from one 529b account to another account or a new one once every 12 months. You can also simply open and begin contributing to an account in your new state and either continue contributing to the old account or just letting it sit and grow without further contributions.
However, there is a caveat to the above YES and that involves state income taxes and any other special benefits one or both of the states in question may offer. Not knowing what specific state plan or plans you are currently invested in and what state plan or plans you want to transfer these investments to, I can't tell you what the state tax consequences may be or what other benefits you may gain or lose as a result of the transfer.
So, yes, you can do the transfer, but I strongly recommend that you consult with a tax advisor who is knowledgeable in these plans and who can advise you how to legally minimize any state income tax consequences and achieve the investment goals you feel you need to best provide for your children's education.
Links to Sites With More Information on 529b Plans
- College Savings Plan Network
- Savingforcollege.com - The internet guide to funding college and Section 529 college savings plans.
Save for future college costs by using qualified tuition plans (529 plans or 529 programs). 529 plans are state sponsored investment programs that are given special tax status.
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