The IRS will allow a change in investment strategy twice in 2009. This is good news for 529 plan participants, especially those who may otherwise be locked into a mix of investments that has turned out to be more speculative than initially contemplated.
Tax-Free Distributions
A 529 plan is a type of qualified tuition program. In a 529 plan, taxpayers contribute to an account established for paying a student’s educational expenses. Eligible educational expenses include the costs of tuition, books, and fees at eligible institutions, such as colleges, vocational schools, and other postsecondary institutions.
Contributions to 529 plans are not tax-deductible. However, earnings are tax-free, and distributions used to pay the beneficiary’s qualified education expenses are tax-free.
A 529 plan should not be confused with a Coverdell Educational Savings Account (Coverdell ESA). The latter is also a savings account for education expenses that offers tax-free distributions. Funds saved in a Coverdell ESA can be used for elementary and secondary school
expenses as well as college costs.
Investment Decisions
Generally, participants in 529 plans must select only from among broadbased investment strategies designed exclusively by the program. Additionally, the IRS has traditionally permitted a change in investment strategy only once a year.
In response to the economic slowdown and the turmoil in the financial markets, the IRS will allow investments in a 529 plan to be changed during 2009 on a more frequent basis. A 529 plan will not violate the investment restriction if it permits a change in the investment strategy twice in calendar year 2009, as well as upon a change in the designated beneficiary of the account.
If you have any questions about 529 plans, or other tax incentives for education, please contact Doeren Mayhew at (248) 244-3000.
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