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Recapture Taxes in 529 Account

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  • Recapture Taxes in 529 Account

    I currently have about 20k in Michigan's 529 (MESP) as I formerly lived in the state and I received a state tax deduction. I currently reside in Pennsylvania which allows state deductions with contributions to ANY 529 plan. While the MI 529 is a great plan, the plan was to invest new money into the NV/Vanguard 529 as the rest of my money is there (simplicity reasons), etc... However, I would also like to move my existing Michigan 529 into the NV plan but I know there are rules regarding recapture taxes in such scenarios which I'd like to avoid.

    I was looking around on the internet and came to this page: https://www.savingforcollege.com/compare_529_plans/?plan_question_ids[]=96&page=compare_plan_questions

    Under Michigan/MESP it says:

    "The principal portion of non-qualified withdrawals from this plan are included in Michigan taxable income to the extent of prior Michigan tax deductions. Qualified rollovers are not subject to recapture."

    https://www.savingforcollege.com/529_plan_details/?page=plan_details&plan_id=27

    I'm just a little confused on what is considered non-qualified vs qualified. I'm assuming moving MI 529--> NV 529 (without using any of the money now) is considered qualified but I don't know that for sure. I would appreciate some feedback.

    Thanks.

  • #2
    Plan to plan transfer should be a qualified rollover.

    However if you want to be sure you won’t get hit with recapture of tax deduction you could contact someone in the MI treasurers office or whoever deals with this and ask directly.

    My state had similar language in the plan documents. And I wanted to transfer earnings only to a cheaper plan and leave contributions in the plan. When I contacted the state office they told me my transfer would be subject to recapture on some sort of a pro rata basis.

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    • #3
      We got a tax credit or deduction for contributing to the Virginia 529 back when we lived there. There is an income tax recapture fo VA, so we just kept the old account, earmarked it for our oldest kid, and aren’t contributing any more to that account. Pretty easy.

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