Should You Transfer Your 529 Account If You Move To Another State?

October 29, 2018

We moved to Texas when my daughter was 4 years old after living in four houses in two different states since she’d been born. (Believe it or not, I’m not in the military.) At that point my spouse “informed” me that we would not be moving again for a while. I agreed to stay where we were for three years. That was 20 years ago, and we are still in the same house. #happywifehappylife

At the time we moved to Texas, we had already established a 529 college savings plan for my daughter in North Carolina, where we lived at the time I opened the account. The question became whether I should transfer that account to a Texas 529 or leave it where it is (or transfer to another state’s plan). The answer isn’t black and white and depends on which state you now live in. Here’s what to consider.

Where you live matters

Each state has their own 529 plan, and some have more than one. However, you don’t have to use your state’s 529 plan, but there may be state tax benefits if you do, depending on which state you live in.

For example, Ohio offers a state income tax deduction for residents who contribute to Ohio-based 529 accounts, while Pennsylvania residents are eligible for a deduction for contributions to ANY state’s plan. California residents are out of luck – no deduction for any state’s plan, including California-based, while Texas residents like me don’t really care about which plans offer a state income tax deduction because we don’t have a state income tax.

Remember that you can use 529 funds in any state, so which state’s plan you choose depends largely on the tax deduction for deposits, followed by the investment options and fee structure of the plan you choose. (more on some of the other basics of 529’s here)

Should your 529 move with you if you switch states?

If you have a 529 plan in a state that you no longer live in, you may want to move your 529. The IRS allows one tax-free rollover from one 529 account to another per 12-month period. These rollovers do not qualify for a state tax deduction, but your future contributions might. Reasons for doing a rollover include:

• To obtain state income tax deductions in your new state
• To use a better plan if you no longer qualify for a deduction
• Simplicity – you don’t want multiple 529 plans in different states (although you are allowed to)

What we did

Like I said, we started a 529 for my daughter in North Carolina, but after we were in Texas for awhile and it became clear that we were going to be there for more than three years, I transferred it to a Texas 529 because I liked the investment options better. Ironically, my daughter ended up going to college in … North Carolina.

Because Texas does not have a state income tax, this did not affect me financially – I had no deduction for deposits to NC or TX plans once we moved to Texas. Her being 1,201 miles away from me, on the other hand, affected me a lot (both financially and emotionally).

The bottom line

If you move to a new state and aren’t sure what to do with a 529 account from your former state, here’s what to consider:

• Opportunity to obtain a state income tax deduction in your new state (reason to transfer unless you move to one of the state’s that allows a deduction for any state’s plan)
• Investment options (if you’re not eligible for a tax deduction in your new state, then choosing a plan with low-cost, high quality investment options would be the top criteria. More on that here)
• You can only transfer from one plan to another once every 12 months (reason not to transfer if you’re planning to move again within 12 months)

What doesn’t matter? Where your child plans to go to school – 529 funds can be used in any state.