529 conversions and moving to a non-income tax state
The 529 account we established for our son has funds left in it sufficient to cover 5 years of maximum $7,000 conversions to his Roth IRA. The account meets all the age and other requirements to be eligible to be converted. We live in Michigan and utilized the state of Michigan’s 529 fund to take advantage of the state tax deductions we received when we funded his account years ago. Michigan’s current position is that they will recapture the tax deductions we got originally. Michigan has a flat income tax of 4.25%.
My son now currently lives in Tennesse, which does not levy income taxes on their residents. If we initiate a conversion to his Roth IRA will our old tax deduction show up on a 1099 issued in Michigan as income in his old state? Or would he escape state taxes being a resident of another state?
I considered rolling our 529 account over to a different provider but can’t find any information about whether doing so would reset the 15 year clock.
Permalink Submitted by Alan - IRA critic on Tue, 2025-03-11 22:33
Paul Curley, CFA has a website that tracks state deduction recovery rules for 529 distributions. He states that the recovery is based on the state in which the owner who received the deduction files taxes. Therefore, if the plan owner no longer resides in the state that provided the deduction, it’s not clear how that state would recapture the tax credit.
As for a change of plan, the IRS has not yet determined whether that will reset the 5 and 15 year clocks. so you might wait until the IRS issues guidance.