529 Rollovers

 

529 Rollovers

 

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A 529 rollover is a movement of funds from one state’s 529 plan into a different 529 plan. There are a few reasons you might consider a rollover. Perhaps you have moved to another state and it offers different tax deductions, or maybe you want to consolidate multiple accounts into one. You can easily roll funds over from one 529 plan to another, however, it’s important to pay attention to the fine print to ensure you don’t incur any tax penalties. We walk you through the details below.

The New Mexico 529 Advantage

New Mexico has one of the most generous tax laws on 529 contributions. If you are a New Mexico resident, you can claim a state tax deduction on 100% of contributions to your 529 plan from your state taxable income every year. New Mexico is one of only four states that offers an unlimited state tax deduction for contributions that are made to its official 529 plan.* For this reason, many new residents consider rolling funds over from an old 529 account into an account with The Education Plan.

Some states will require you to pay back any previous tax deductions you received if you roll funds over into another state’s plan. We recommend consulting a CPA or tax professional before completing a rollover to ensure you won’t incur tax penalties.

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529 Plan Rollover Details

According to federal law, you are entitled to one tax-free 529 rollover within a 12-month period per beneficiary. It’s important to note that this rule is per beneficiary, not per plan. If your beneficiary has multiple accounts open for him or her, you will need to coordinate with the other account owners to ensure that only one rollover takes place in a 12-month period.

For example, if you have a 529 account for your daughter, and her grandparents have a separate account in a separate state’s plan for her, you will need to make sure they have not completed a rollover in the last 12 months before you complete yours.

There are two ways to perform a 529 plan rollover:

1. If you want to roll funds over into an existing or new account with The Education Plan, you can easily complete it by logging into your account and selecting “Rollover from another 529” from the drop down menu. Or you can fill out this rollover form.

2. If you prefer, you can also handle the rollover yourself by requesting a distribution from your old 529 plan and then redepositing that amount into your account with The Education Plan.

Regardless of who does it, the rollover must be completed within 60 days or the funds will be considered non-qualified and taxed accordingly.

If you violate any of the regulations, including rolling over more than once in a 12-month period or not respecting the 60-day time limit, the funds can be considered unqualified contributions, and you may have to pay state and federal income taxes, plus a 10% federal income tax penalty on earnings.

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The Difference Between a Rollover, a Transfer and a Change in Beneficiary

There are clear distinctions between a 529 rollover, a transfer, and change in beneficiaries.

  • A 529 plan rollover is when you move funds from one state’s plan to another. As noted above, you can complete one rollover per beneficiary in a 12-month period.
  • A transfer is when you transfer funds from one beneficiary to another within the same plan. There is no penalty on transfers, and you can complete as many of them as you like within a 12-month period. For example, if you have an account set up for each of your two children in The Education Plan, you can transfer money between the two accounts.
  • A change in beneficiary is when you change the beneficiary on an account from one person to another. You may change the beneficiary of an account without any tax repercussions, as long as it is to a qualifying family member, which include siblings, nephews and nieces, cousins, parents, and other relatives of the original beneficiary. You can change beneficiary on an account as often as you want with no penalties.

There are many reasons you might consider a 529 rollover. The Education Plan offers low fees, flexible investment options and unbeatable tax benefits for New Mexico residents. If you are considering rolling over funds into an account with The Education Plan, our team would be happy to answer questions you may have and complete the rollover. You can reach us at 1-877-337-5268.

The Bottom Line

*New Mexico does not permit state tax deductions for contributions used to pay for K-12 tuition payments and transfers to an ABLE account. It likely will not allow deductions for contributions used to pay for student loan repayments and apprenticeship programs. The amounts deducted for these purposes may be recaptured as state taxable income in subsequent years. Click here for more information.

 

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Please Note: Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program. You also should consult a financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plan’s features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

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