Yes, there may be federal income tax consequences to an outbound 529 rollover from Illinois to another state, even though 529 rollovers are generally not taxable. This is because some states treat outbound rollovers as taxable events. Unfortunately, Illinois is one of those states. You may have to pay state income tax on the earnings portion of the rollover, and the state may impose a recapture of any state income tax breaks applicable to the distribution.
The states that penalize outbound rollovers include Alabama, Arkansas, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Rhode Island, Utah, Virginia, Washington DC and Wisconsin.
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