Expert: Allen - 5/23/2007

Question
Just changed jobs and have a decision to make regarding a pension distribution. My question: Does the law allow for a direct rollover into a college savings plan (i.e., 529)? am guess that to do it indirectly would incur the 20% penalty plus taxes.

Answer
Unfortunately you can not rollover a pension distribution to a 529 plan and avoid the 10% excise tax. As you point out, you can only do it indirectly. One thing to be aware of - the 20% figure is the amount withheld for federal income tax. The actual income tax will depend on your tax bracket. In many cases this will be more than 20%. Also, in most states the distribution will be subject to state income tax.