Section 529 Plans: Front-Loaded Contributions, Beneficiary Changes, Form 1099-Q and Plan Selection

Description

The primary benefit of Section 529 plans is that they are relatively simple to establish and operate, and contributions and earnings can be withdrawn tax-free for qualified education expenses. Although there is no federal tax deduction, most states offer some form of benefit or deduction for these contributions. IRC Section 529(c)(2)(B) does provide some leniency. It permits front-loading these plans. Lump sum contributions of up to $75,000 (five years at $15,000 a year) can be made for a single beneficiary without using a taxpayer's lifetime gift and estate tax exemption.

Crucial decisions must be made by taxpayers participating in these plans. Initially, the donor must decide whether the investment should be made through an adviser or directly to a state plan and, if a state plan, which state? Qualified expenses paid from a 529 plan now include tuition paid for grades K-12 and certain post-secondary institutions in addition to colleges and universities. For certain taxpayers, a ROTH IRA may be a viable alternative to a Section 529 plan.

Listen as our panel of experts explains the operation and tax benefits of 529 plans, including beneficiary eligibility, qualified education expenses, and the related IRS reporting requirements.