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Can you transfer 529 B accounts from one state program to another?

Updated on October 29, 2011

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.

Graduates entering auditorium at Northern Arizona University
Graduates entering auditorium at Northern Arizona University | Source

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.

College Graduation Ceremony at Northern Arizona University
College Graduation Ceremony at Northern Arizona University | Source

Comments

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    • Chuck profile imageAUTHOR

      Chuck Nugent 

      6 years ago from Tucson, Arizona

      purcellsirish - thanks for your comment and I am glad that this Hub was of help to you.

      There are a number of good sources on the Internet that can help you in your search for a new plan. And one thing you should look for is a plan with reasonable fees.

    • profile image

      purcellsirish 

      6 years ago

      I needed this answer because I just found out that the one I have money in is one of the worst ones out there (John Hancock FYI if you are in that also) so I need to move to another one. It's fees are terrible according to a recent post on the internet.

    • MOORESHOES profile image

      MOORESHOES 

      7 years ago from USA

      The question is great!

    • cloudhardy profile image

      cloudhardy 

      7 years ago from United State

      Good Hub!!!!!

      The hub is informative and information shared is amazing. 529b Colleg Plans are very much similar to IRA (Individual Retirement Accounts. In this case it allow people to save and invest money for a specific purpose without having to pay income taxes on the income generated by the investment in the account. Thanks for sharing and keep on hubbing.

    • ciidoctor profile image

      ciidoctor 

      8 years ago

      amazing information thnx

    • profile image

      Twin XL 

      9 years ago

      Excellent details, great post! Thanks!

    • Chuck profile imageAUTHOR

      Chuck Nugent 

      9 years ago from Tucson, Arizona

      valson - Good question. I don't know the answer and I suggest you consult a tax professional about this.

      Chuck

    • profile image

      valson 

      9 years ago

      Thanks for this useful post. Can money from 529B be used to fund higher education done overseas? Say if my child should go to a college in England

    • sophieqd profile image

      sophieqd 

      9 years ago

      Can_you_transfer_529_B_accounts_from_one_state_program_to_another

      Thank you very much for this hub! It's really very useful.. I appreciate it very much and will follow your advice!

    • pkoson profile image

      pkoson 

      9 years ago

      Can_you_transfer_529_B_accounts_from_one_state_program_to_another

      I think this hub is the anti-anti-toxin to anxiety! Help, the verbosity of it is making me anxious!

    • nancydodds1 profile image

      nancydodds1 

      9 years ago from Houston, Texas

      Good features you introduced about accounts in one state program to another. Iam sure that my hub information will be helpful to you about mortgage calculator.

    • Chuck profile imageAUTHOR

      Chuck Nugent 

      10 years ago from Tucson, Arizona

      pkpkpkpk - thanks for visiting my HubPages and for leaving a comment. As I said in the article, there may be taxes if you move to another state AND transfer your plan to one sponsored by your new state of residence.

      My suggestion to you would be to wait until you actually move to a new state as tax laws may change between now and then rendering any advice you obtain from anyone now moot. I suspect (but check it out with a good tax advisor) that if you moved and simply kept the current account and either kept contributing to it or just let it sit and open a new account with your new state's plan for future contributions that you probably would not incur any state tax liability. It appears that state taxes are imposed when the account is transferred from one state plan to another an not when the owner of the account simply moves to a new state. But, again, discuss this with a knowledgeable and reputable tax advisor at the time you want to make such a change but BEFORE making any changes. Chuck

    • profile image

      pkpkpkpk 

      10 years ago

      This year, I am contributing to my state's plan (CT) because I get a tax break. If in a few years, I dont reside in CT anymore, can I move it to another state's plan without having to lose the state tax gains I made?

      TIA!

    • Chuck profile imageAUTHOR

      Chuck Nugent 

      11 years ago from Tucson, Arizona

      Jaypee4u, Thanks for visiting my HubPage and for your comment. You are correct in concluding that this does not apply to you. These accounts are just for Americans and can only be used to save for their children's (or grandchildren, nieces, nephews, etc.) college education. The difference between these accounts and regular savings accounts earmarked for college savings is that the income (interest and/or dividends if invested in securities) is not subject to American Federal Income tax. Also, depending upon the state in which one lives, the money deposited into the account may also qualify as a deduction from income for that state's income tax purposes.

      Unless you are an American citizen or a non-citizen living and working in the United States, these accounts do not apply to you. If you are a non-citizen working in the U.S. you are subject to Federal and State income taxes and therefore MAY be able to qualify for these accounts (see your tax accountant). If you are neither a U.S. citizen nor work and earn an income here you don't have any need for the account anyway since you are not subject to U.S. federal or state income taxes. Chuck

    • jaypee4u profile image

      jaypee4u 

      11 years ago from Alappuzha

      I am new here and from india there is nothing I can do about it,is there?

    • Paul Edmondson profile image

      Paul Edmondson 

      11 years ago from Burlingame, CA

      Chuck, Thanks for the details. I'll check out the state tax consequences and let you know what I find. We're in California and would like to move it to Nevada's state program from New Hampshire.

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