Ask Terry Questions 529 plan out-of-state

529 plan out-of-state

By Terry Savage on July 18, 2019 | College Savings / Student Loans

I started an Indiana 529 plan for my kid a few years ago when I lived in Indiana. Now I live in Illinois. Illinois does not permit 529 plans to be used for K-12 private school expenses, but Indiana does permit it. If I withdraw funds from the Indiana 529 plan to pay for a Catholic school in Illinois, will I owe Illinois state taxes on the growth in the 529 plan? Thanks!

Terry Says

Honestly, I’m not quite sure how to answer that question — because it likely hasn’t been decided by the Illinois department of revenue — as far as I can research.  So I don’t know where you would have to declare it as taxable income since the state of Indiana isn’t sending you a 1099 for the money because of their stance.

But why take the chance? The whole point of the 529 plan is to let it grow tax-free for college expenses in ANY state!  You’d likely be better off in the long run letting the money grow tax-free to pay for college in any state– and using current income to pay for private secondary school.

If you do decide to withdraw, and are assessed taxes by Illinois, just remember that only the EARNINGS withdrawn are taxable, not the original contribution. So the tax impact would be minimal, at best.

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