When
Congress passed the Pension
Protection Act last summer,
it granted permanency to Section
529 tax-advantaged college
tuition plans, eliciting a
collective sigh of relief
from concerned parents, state
administrators and the securities
brokers who sell them. Without
such action, 529
plans had been scheduled
to lose their tax-free withdrawal
advantages in 2010.
But, that long-awaited permanency came at a price:
The bill also instructed the Department of the Treasury to close
the loopholes that could allow the wealthy to use 529s to sidestep
estate and gift taxes.
Since then, the Treasury and the Internal Revenue
Service have been soliciting suggestions from all sides, including
the National Association of Securities Dealers, or NASD, and the
Securities Industry Association, or SIA.
"I'd say it's following the normal course of action,"
says Sean Kevelighan, senior adviser for the Treasury's
Office of Tax Policy. "Officials are working together to consider
the options and provide appropriate actions." Kevelighan says there
is no time frame for action, however.
Now that 529s are here to stay, all parties are looking for clarity on their rules and regulations, especially those pertaining to the perceived loopholes that could sully an otherwise well-intentioned and socially beneficial program.
Although actual cases of 529 misuse appear to be rare so far, Congress wants to avoid the kind of blatant flouting of the intent of the tax code that occurred when fat cats found a way to write off the full cost of their Hummers under a little-known, 35-year-old farm truck deduction. That gaping loophole was subsequently closed.
529s: a state-issued product
John Gannon, vice president of investor education for NASD, says that while everyone agrees that 529 plans are a good thing, the mechanics of how they operate have presented some unforeseen challenges.
"They are an unusual animal in that they are a state-issued investment product. The only other investment product that is issued by a state is municipal bonds. It's easy to understand why municipal bonds are issued by states, but I don't understand why 529s were in the first place. A 529, for the most part, is a wrapper around a mutual fund or a bunch of mutual funds," he says.
Liz Varley, vice president and director of retirement police for SIA, offers her own theory: "I think the people who enacted this program thought they would be run by a little state office to help people go to college. The next thing you knew, you had huge financial services firms basically being the 800-number branch office for XYZ state plan. They didn't have any concept that that was going to happen, and probably neither did the financial services industry."
Andrea Feirstein of AKF Consulting, who advises 16
states on their 529 plans, says the challenge now is to shore up
those program areas that are most prone to abuse while avoiding
such Draconian measures as the excise tax of up to 50 percent on
unqualified withdrawals proposed by the Bush administration that
could scare customers away.
Varley agrees: "The consensus of people in our industry
is that those excise taxes really would have killed 529 plans.
"People go in saying, 'I'm going to put away $50,000
for Susie's education, but what if I have a catastrophic medical
emergency? Or lose my job?' You want to know that you can take it
back," she says. "If the majority of people truly save with the
hope of making qualified withdrawals, then those excise taxes don't
matter. But to impose them, to put them on the books, has a chilling
effect."
What changes might be in store for that 529 plan you're eyeing for your son, your daughter or even your golden years? Below are some issues that will likely be addressed.
| 529 plans are intended to be tax-favorable college savings
vehicles, not tax shelters for the extremely wealthy. |
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Areas of concern for
the
Treasury
Department
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