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Monday, December 29, 2008


Section 529 plans are a popular method for savings and investments relating to education expenses. The plans allow investments to grow and be expended for qualified education expenses, free of income taxes. They also allow for contributors to use up to five years of present interest gift tax exclusions in one year, so as to avoid or limit gift taxes on funding of a plan account.

The Internal Revenue Code requires that investment planning and oversight for a plan account cannot be done at the direction of the contributor or beneficiaries of the plan. This requirement has previously been loosened by the IRS in Notice 2001-55, which together with regulations, allows the contributor to select a general investment strategy upon funding, which can be revised once a calendar year and upon a change of designated beneficiary.

As we all know, the investment markets have been wildly turbulent in recent months. To assist taxpayers in preserving value in Section 529 plan accounts in regard to the current state of the markets, the IRS has now announced that the once-per-calendar-year adjustment will be changed to two adjustments for calendar year 2009.

Such relief is beneficial to the plans and their beneficiaries - assuming that taxpayers are astute enough investors to exercise the adjustment powers in a manner that increases overall investment returns. One has to wonder, however, that if twice-per-year adjustments are worthwhile for 2009, then why not allow them for all future years?

Notice 2009-1, 2009-2 IRB, 12/23/2008

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