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.

"Draconian" Rule

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 year’s tax legislation by permitting rollovers once a year from one state’s plan to another state’s 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 don’t have to roll over from one state’s program to another’s just to change your investment strategy," Luscombe observed.

Is further liberalization ahead? Perhaps, but don’t 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 they’ve made it very clear that funds and investment strategies have to be devised solely by the program sponsor. Contributors can’t 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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