25 Apr What happens with taxes if I move my 529 plan out of N.J.?

Q. Are there possible tax implications if I move my current 529 plan from NJBEST to another financial institution? Are there any specific benefits to leaving it with NJBEST besides the scholarship?
— Parent

A. 529 plans are hands down the best way to save for college.

They’re tax-free as long as you use the money for qualified education expenses.

The IRS allows you to roll over a 529 to another plan once every 12 months without tax implications and without changing the beneficiary, said Jeanne Kane, a certified financial planner with OneDigital in Boonton.

If you do more than one in 12 months, you’ll owe taxes on the earnings portion of the amount transferred plus a 10% penalty because it will be considered a non-qualified withdrawal, she said.

There is a time constraint.

“You have 60 days from the time you distribute funds from the original 529 to roll the funds into the new 529 plan,” she said.

In 2022, NJBEST joined many other states that offer a state tax deduction on contributions made to the plan, Kane said.

Currently, New Jersey taxpayers with gross income of $200,000 or less may qualify for a state income tax deduction on their contribution up to $10,000.

If you made contributions to NJBEST prior to 2022, you didn’t receive an income tax deduction and there are no tax implications to moving your 529 to another financial institution, she said.

If you made contributions 2022 and later, you should have received a tax deduction, she said.

“New Jersey doesn’t recapture or ‘claw back’ 529 contribution tax deductions if the account is rolled over to an out-of-state plan,” she said. “But there are states that offer tax breaks and do recapture tax deductions.”

Kane said it is a good idea to double-check with NJBEST if you decide to transfer a 529 to an out-of-state plan in future years in case New Jersey changes tax rules.

Also note that NJBEST may charge a $75 “rollover fee” to move the 529 to another plan, Kane said.

You asked about other advantages.

NJBEST offers a tax-free scholarship to its 529 beneficiaries of up to $6,000. The amount varies based on how long the plan has been open, Kane said.

“If you move the 529 to another state, you’ll lose the potential scholarship,” she said.

These are the requirements per the NJBEST website:

The student must be a beneficiary of a NJBEST 529 College Savings Plan opened for at least four years. Total contributions to the NJBEST 529 plan must be equal to at least $1,200.

The contributor must make a withdrawal for qualified education expenses from the NJBEST account for which the student is beneficiary during the same semester the student applies for the scholarship.

Either the student or contributor must be a New Jersey resident at the time of college attendance.

The student must be enrolled at least half-time in an eligible New Jersey higher education institution, for either the fall or spring semester, and the scholarship may be awarded only once to an eligible beneficiary.

The scholarship amount is determined at the time the student first enrolls full-time after graduating from high school or earning a GED.

Kane said you should compare fees if you consider changing plans.

“High fees will chip away at performance,” she said.

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This story was originally published in April 2024.

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