Dear Dr. Don,
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I recently read your response to a question from Lori Long-Term regarding the move of a 529 plan to a prepaid college tuition plan. We are in a similar situation.
As Florida residents, we have 529 plans for our 6-year-old child. The state's prepaid tuition plan recently reduced the plan cost, which was good news. A lump sum for the four-year university plan will cost us $27,250.34. We would like to transfer the funds from our out-of-state 529 plan to the Florida prepaid tuition plan. As I understand, the Florida prepaid tuition plan is separate from the Florida 529 savings plan. Can we transfer or roll over from our 529 plan to the Florida prepaid tuition plan without penalty? What do you think?
Thank you, -- Brian Baccalaureate
Dear Brian, While both plans' qualified tuition programs, or QTPs, are classified as 529 plans, you're correct that the Florida prepaid tuition plan is separate from the Florida 529 savings plan.
From the federal government's perspective, there's no penalty if you roll over or transfer funds from one QTP to another. Here's what IRS Publication 970 on "Tax Benefits for Education" from 2013 has to say:
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Rollovers and other transfers Assets can be rolled over or transferred from one QTP to another. In addition, the designated beneficiary can be changed without transferring accounts.
Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution.
Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. These are not taxable distributions.
The 2014 version of Publication 970 was not available at this writing. While no change is expected in the rules for transferring or rolling over the funds, you should confirm that prior to making the transfer. It wouldn't probably apply to your situation, but Publication 970 cautions, "If the rollover is to another QTP for the same ben??eficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary."
The issue of a penalty tax is more likely to come from the other state where the account originally was funded. Several states allow tax deductions for contributions, but only for contributions to that state's plan. A transfer or rollover may trigger a state tax obligation where the state reclaims your past deduction. Review the plan documents, check with the original state plan and perhaps also talk to a tax professional about any tax impact.
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