To make a very long story short, my late father created a 529 plan for my nephew. My half-brother, who is the executor of Dad’s will, currently controls it and has decided to transfer control of it to me (my sister and brother-in-law, said nephew’s parents, are terrible with money, to put it politely). He is asking me to set up a new account on the NY plan and send him the account information so he can transfer the funds from the existing account that Dad set up. My brother, to put it politely, often thinks that he knows the best and/or only way to do things without actually having done his homework. (When Dad was in hospice, I think he was just reordering the same groceries every week without actually checking what was needed and what Dad was eating. I threw away a lot of spoiled food when it was my turn to stay with Dad, and eventually Dad, in one of his lucid moments, told my brother he was fired as grocery manager - after all, I could put in a Fresh Direct order remotely as easily as anyone else could.)
The current 529 plan is currently the NY State plan, which I guess made sense since Dad lived in NY. Not having children myself, I know zilch about 529 plans, except that they have certain tax advantages, etc. Is there any reason I couldn’t/shouldn’t create an account on Illinois’ plan instead, since I, the nephew in question, and others who might want to contribute to the account actually live in Illinois?
The way the 529 plans are linked to states are a bit confusing. I think they were originally set up so that the states could have a savings program for the colleges in their state. Using money in a state’s 529 may give a discount for state colleges in that state. However, as I’m sure you know, kids don’t necessarily go to college in their home state. If your nephew is certain he’s going to an Illinois college, then there may be some advantage to having the 529 in IL. But otherwise, you can leave the plan in NY. Anyone can contribute to a 529 no matter where it is and where they live. I’m not sure if you have to make a new account in order for you to be the administrator. Contact the NY State plan and see how to change the owner.
A 529 is like a special savings program that grows tax-free. Money can be spent on qualified expenses–like tuition and books–without tax consequences.
If you have a financial advisor for yourself, you may want to check with them. When I set-up a couple of 529 college savings plans for my kids, using money from my inheritance, my advisor at the time connected me with a plan in Virginia, even tho I am in California. I asked about that and he told me there is no requirement to have a 529 account in the state in which you live, so I guess it’s a matter of preference is all. The funds I used in the 529 were all nationally available anyway, so I am not sure what difference it would have made.
The 529s I set-up for my kids paid for both of their college educations, so they are both able to start their post-college adult lives college-debt-free. You are doing your nephew a huge favor by getting all this in order now
My nephew just finished his first year of community college (he’ll be 19 in August). School isn’t really his thing (he has some pretty bad ADHD and the pandemic was really not good to him, educationally). I don’t know that he will finish a bachelor’s degree anywhere, but I can see him going into some kind of vocational program. And even if not, eventually the 529 could be rolled into a Roth IRA for him.
I don’t have a financial advisor (my finances are pretty straightforward), but maybe one of these days I should find one. As far as I can tell, the main advantage of having a plan in the state where everyone actually lives who might contribute to it is that then people who contribute can deduct their contributions on their state taxes. I’m just checking to see if I am missing anything important. The customer service person I spoke with in NY was pretty clueless and told me she wasn’t sure whether Illinois had a plan, even when I assured her that they do, and had no clue, even when pressed, whether it was possible to roll over the funds from the NY plan to an Illinois account. Maybe I’ll try calling again tomorrow and see if I have better luck. (I even asked if there was someone I could talk to who could give me a definitive answer to that question, and she said she didn’t know.) Luckily the Illinois phone rep had more of a clue and said “sure, you can find the rollover form on the website.”
Rollovers are subject to New York State tax on earnings
A rollover of assets from your Direct Plan account to a 529 plan in another state is subject to New York State income tax on earnings, as well as the “recapture” of New York State tax deductions previously taken.
You definitely need to check with a financial professional before you move the funds.
It’s not my plan yet…but good point. I have made no contributions to it as of yet, nor have I ever needed to file a NY tax return, so what would NY possibly tax me on? I haven’t deducted anything, and Dad is dead.
Do you know if the 529 is currently being used to pay for the CC and related expenses? And do you know the scale of how much is in the 529? Would it pay for 4 years at a traditional college? Or would two years at CC pretty much wipe it out?
It’s been used to pay for the CC (albeit indirectly - my brother has not exactly been transparent about any of this. Apparently there were issues with him getting prompt access to the funds in the aftermath of Dad’s death when some accounts were frozen, and he was paying the CC tuition out of pocket and then reimbursing himself). My understanding is that there’s $30-something thousand left. About enough to pay for an associate’s degree, if the nephew lives at home, but definitely not a bachelor’s degree, even in-state. But still a hell of a lot better than nothing.
Maybe I should create a NY 529 account so it can be rolled over to something that I can at least control, because getting my brother to do anything has been like pulling teeth and he actually seems to be paying attention to this at the moment, and then figure out the rest later?
They probably wouldn’t technically tax you - but it possible that they could withhold taxes from the withdrawal and your father’s estate will have to file a return to get any refund that might be owed. That might be a good reason to just keep the funds in the New York plan unless you are planning to contribute money and Illinois will give you a tax deduction for contributing. Before you move the money see if Illinois provides a deduction for donations - and if that deduction is only for account owners. In NY, if I own the account and my mother contributes , she doesn’t get a tax deduction. Who currently owns the account - not who is in charge, who owns it? Did your father name a successor owner on the plan or does your father’s estate own it ?( my grandchildren are very young so I named my daughter as my successor on their accounts in the NY plan )
As far as the taxes go, if you decide to open an account in Illinois ,you will probably need to speak to an tax professional in New York.
I would do this - no telling if he’ll be immediately cooperative when you have all the information you need.
Yeah, I will probably take a look at the website tomorrow morning with a clear head. The customer service rep I spoke with tonight was really clueless.
I don’t actually know the answer to this question. Let’s see if I can actually get my brother to communicate.
The reason to have an IL account instead of a NY account would be the IL state tax deduction for contributions. There is literally nobody living in NY anymore who would make contributions. But given that it’s been more than a year and my brother is just getting around to dealing with this, I’m going to percolate a bit. Maybe if anyone in IL wants to make contributions, we just set up a separate IL account.
If you transfer the funds to a new 529, you’ll have to wait 15 years before you’re allowed to roll leftover funds into a Roth for your nephew. Be VERY sure transferring is beneficial.
That form says the new owner will be responsible for any NYS taxes subject to recapture. I think you’d be best off opening a second account in Illinois if anyone there wants to contribute. Although if his parents are the ones who want to contribute , there used to be financial aid benefits if the parents own the account.
How likely is it that people will be contributing to his 529 at this point? If he’s already started school and isn’t really into it, I’m not sure that putting more into a 529 makes sense. Maybe wait until someone in IL wants to contribute before making a 529 in IL.
Just so you know, this is perfectly normal and legal, as long as everything happens in the same calendar year. As long as you can show a 1098-T(s) from the college(s) that is equal to or greater than the withdrawals that took place that calendar year, everything is fine.
You can in theory transfer money directly from a 529 to the college without it ever passing through your hands, but I’ve found that to be way more hassle than it’s worth.
I don’t have anything specific to contribute, but I will second (or third or whatever) the recommendation to talk to a financial advisor with a specialty in 529 plans, even if it’s just a one-time consultation about this issue. Without guidance you could make a mistake that you will regret for years. When I discussed 529 plans with my advisor some years ago, he recommended two or three specific states (none were my home state), for very specific reasons which I don’t currently remember.