One Rollover Down, Three Moves to Go
Priya, 41, owns a 529 account for her son, Rohan, with a $120,000 balance. In January she completed a 529-to-529 rollover of the entire balance from Plan A to Plan B, same beneficiary. In May she wants to move $60,000 from Plan B to Plan C because Plan C's expense ratios are 0.15% lower. She also wants to move $17,000 from Plan B into an ABLE account for Rohan, who has a qualifying disability and is the designated beneficiary of both accounts, and to withdraw $14,000 this year to pay Rohan's private high school tuition. Plan B is her home-state plan and she claimed the state deduction; Plan C is out of state. She has made no other 529 withdrawals this year and no other contributions to the ABLE account, whose annual contribution limit for the year is $19,000 and whose balance is $40,000.
1. Which of the three May moves can she make this year without creating a taxable distribution, and why?
Read the worked answer
1. Plan B → Plan C, $60,000 - not this year. The once-per-12-month limitation applies to 529-to-529 rollovers for the same beneficiary. It is measured per beneficiary and aggregates across every 529 account and every plan - it is not one rollover per account and not one per plan. January used her window. A further move of the same beneficiary before the following January is not a rollover: it is a distribution to the account owner followed by a new contribution.
2. $17,000 to the ABLE account - yes, it fits. A 529-to-ABLE transfer for the same beneficiary (or an eligible family member) is a qualified rollover and is not a 529-to-529 rollover, so it does not depend on, or reset, the 12-month window. Two constraints:
- It counts against the ABLE account's annual contribution limit of $19,000 - $17,000 fits, with $2,000 of room left.
- The ABLE account must stay within its aggregate limit; $40,000 + $17,000 is well inside it.
3. $14,000 for private high school - partially. Only up to $10,000 per beneficiary per year of elementary and secondary tuition is a qualified 529 distribution. $10,000 qualifies; $4,000 does not. Books, transportation and activity fees are not covered at the K-12 level.
Net: only the ABLE transfer and the first $10,000 of the tuition withdrawal are clean this year. Defer the Plan C move to January.
2. Quantify the consequences if she makes the Plan B → Plan C move anyway, and if she takes the full $14,000.
Read the worked answer
The $60,000 move treated as a non-rollover
- Only the earnings portion of the $60,000 is taxed, not the principal. She needs the plan's earnings-to-basis ratio for the account; if earnings are, say, one-third, roughly $20,000 is ordinary income to her as distributee.
- A 10% additional tax applies to that earnings amount - approximately $2,000 on the $20,000 - unless an exception applies. There is no exception here; the common ones are scholarship, death or disability of the beneficiary, and attendance at a U.S. military academy.
- The $60,000 is also a new contribution to Plan C, subject to gift tax rules and to whatever contribution limits Plan C applies.
- The 0.15% fee saving on $60,000 is about $90 a year. The tax cost in year one is in the thousands. The fee argument does not survive contact with the math.
The $4,000 of nonqualified K-12 withdrawal
- Earnings attributable to the $4,000 are taxable to her plus the 10% additional tax.
- If her state did not conform to the K-12 expansion, the state may also recapture the deduction taken on the original contribution and tax the earnings at the state level. Confirm the state's position before the withdrawal, not after.
Practical step: get the earnings-to-basis breakdown from the plan administrator in writing before any distribution, so she can see the actual tax exposure rather than an estimate.
3. What does the home-state deduction mean for the Plan B → Plan C move, and what should you tell her about the $14,000?
Read the worked answer
The deduction is the dominant cost, not the 0.15% fee.
- Plan B is her home-state plan and she claimed the state deduction on her return. Most states recapture that deduction - and may tax the earnings - when the money is rolled to an out-of-state plan or withdrawn nonqualifiedly.
- Run the number both ways before she decides: annual fee saving of roughly $90 versus a potential recapture of the entire deduction plus state tax on earnings. The fee case almost never survives that comparison.
- The sequencing insight: if she still wants Plan C eventually, the deduction recapture is the same whether she moves in May or next January. So the 12-month rule costs her nothing in state tax terms - it simply prevents an additional federal penalty on top of the recapture. That is the message that will actually land.
On the $14,000 tuition withdrawal
- Tell her plainly: $10,000 qualifies, $4,000 does not, and the $4,000 carries federal tax on earnings plus the 10% additional tax, and possibly state recapture and state tax.
- Ask whether the school bills in a way that lets her split payments across calendar years - $10,000 in December and the balance in January - which converts a taxable excess into two qualified withdrawals.
- Confirm her state conforms to the K-12 provision and to 529-to-ABLE rollovers, since nonconforming states can claw back the deduction on either transaction.
- Document the conversation: she was told the limits, the tax treatment, and the state risk, and she chose among quantified options.