Targeting 529 Abuses
According to the Kiplinger’s Washington Editors, the IRS will clamp down on 529 plans this year and issue regulations that will target abuses. Under the microscope: putting as much as $120,000 (the maximum 529 pay-in that’s free of gift tax) into accounts for different people, then quickly changing the beneficiary on all of the accounts to one individual. And another ploy…stuffing a lot of money into a 529 plan and later using the funds to pay for retirement. That allows contributors to circumvent the pay-in ceilings and distribution requirements that apply to qualified retirement plans.
A Change in 529′s
Politics isn’t the only place where people are opting for change, states the Investment News.
Nervous account holders spooked by the recent turmoil in the markets are either switching over to more conservative investments in their Section 529 college savings plans or inquiring about options such as account rollovers, according to state officials in charge of programs.
“We’ve seen a dramatic increase in investment changes, and 99% are being made into certificates of deposit, which we began offering in October,” said Megan Perkins, program director for Wisconsin’s College Savings Program in Madison. The state’s EdVest direct-sold plan, which offers the CDs, has about $1.2 billion in assets.
According to Internal Revenue Service rules, 529 account holders can change allocations to an account for the same beneficiary only once during a calendar year.
As a result, industry officials say, a number of account owners who have already made the one change, or “rebalancing” permitted by law, are considering rolling over their accounts from one state plan to another so that they can make a change, or have already done so.
Finding the “positive” side to your 529
529 plans are tax shelters, according to the Wall Street Journal, that allow you to invest tax-free for college expenses. In a curious twist, if you have lost money in one of these accounts, you may still be able to deduct those losses from your adjusted gross income.
The tax break in question would show up as a miscellaneous itemized deduction on your income tax return. You can only deduct those to the extent they exceed 2% of your adjusted gross income.
There are lots of caveats. This is one of those things you don’t want to try on your own, consult your tax accountant.