IRS Cuts 529 Contributors Some Slack
Managing Your College Savings Fund Just Got Easier
(RIVERWOODS, ILL., September 12, 2001) Contributors to popular 529 college
savings programs will no longer be locked into their initial investment decisions,
according to CCH INCORPORATED (CCH), a leading provider of tax and business law
information and software. Guidance just issued by the IRS will allow contributors to
switch from one investment fund offered by a plan to another once every 12 months or
whenever there is a change of beneficiary, such as from one child in a family to another.
Qualified tuition programs known as 529 programs because of the section of the
Internal Revenue Code that defines them allow taxpayers to invest in state-run
savings programs for higher education expenses. The programs often are administered by
mutual fund companies on behalf of the states.
As originally written, however, the law said that contributors could not
"direct" their investments or the earnings on them. Earlier proposed IRS
regulations permitted contributors to make an initial selection from a menu of investment
funds offered by a program, but after that decision, no further changes were possible,
even if economic conditions changed drastically.
"This was a pretty draconian rule, and Congress addressed it somewhat in this
years tax legislation by permitting rollovers once a year from one states plan
to another states plan, beginning in 2002," said Mark Luscombe, principal
federal tax analyst for CCH.
Now, the IRS has issued a notice that programs will not be disqualified if they permit
contributors to change their investment strategies no more than once per year or when
there is a change in beneficiary.
"In effect, the IRS is getting a jump on the law, saying that you dont have
to roll over from one states program to anothers just to change your
investment strategy," Luscombe observed.
Is further liberalization ahead? Perhaps, but dont count on it, Luscombe advises.
"The IRS decided not to allow contributors to make changes simply because there
were changes in market conditions or because a program was offering a new investment
option. And theyve made it very clear that funds and investment strategies have to
be devised solely by the program sponsor. Contributors cant design their own fund.
Giving contributors more power to direct their investments will probably require further
legislative changes," Luscombe said.
About CCH INCORPORATED
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served
four generations of business professionals and their clients. The company produces more
than 700 electronic and print products for the tax, legal, securities, human resources,
health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer
North America. The CCH web site can be accessed at www.cch.com. The CCH Federal and State Tax Group web site can be
accessed at http://tax.cchgroup.com.
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