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Who controls a 529 College Savings Plan?

by
Lee Reams, BSME, EA
on
12/28/2014
Who controls a 529 College Savings Plan?

Section 529 plans are not irrevocable gifts and the taxpayer retains control. Control stays in the hands of the adult responsible for the account. Generally, this is the same person who contributed the money, but it doesn't have to be the case. Someone else, for example, a grandparent, could make the donation but name the child's parent as the account owner. Money does not come out of the account without permission from the account owner. If the designated beneficiary of the plan decides not to go to school, then the account owner can simply change the beneficiary to someone else in the family.

There is no Federal tax deduction for making contributions, but taxes on the earnings within a 529 Plan are tax-deferred while they are held in the account, and are tax-free when withdrawn to pay for qualified education expenses. Distributions from plans of private institutions can qualify to be tax-free. This allows taxpayers to accumulate money for college at a much faster rate than if they had to pay tax on the investment gains and earnings.

Distributions from a Sec 529 follow the Code Sec. 72 annuity rules meaning that distributions are treated as representing a pro-rata share of the principal (i.e., contributions) and accumulated earnings in the account. So, the part of the distribution representing the amount paid or contributed to the QTP doesn't have to be included in income, because that part is a return of the investment in the plan.

If the earnings from the 529 Plan are withdrawn and not used for higher-education expenses, the earnings withdrawn will be subject to both regular taxes and a 10% penalty. When applicable, the penalty is computed on Form 5329. Before becoming concerned, remember, had the taxpayer not utilized the tax deferral benefits of the Sec 529 Plan, they would have accumulated significantly less in the account that will generally more than offset the 10% penalty. Penalties can be avoided by making a tax and penalty-free rollover from one 529 Plan to another, and remember, a taxpayer can change beneficiaries to a 529 Plan without penalty.

Contribution to a QTP is a completed gift from the contributor to the designated beneficiary. Therefore, any subsequent transfer occurring by reason of a change in the designated beneficiary or a rollover from the account of the original designated beneficiary to the account of another beneficiary is treated as a transfer from the original designated beneficiary to the new beneficiary. This is the result even though the change in beneficiary or the rollover is made at the direction of the contributor under the terms of the contract. (Preamble to Prop Reg § 1.529-5, 8/24/98)

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Lee Reams, BSME, EA

Lee Reams, BSME, EA

Editor-in-Chief

Besides his role at CountingWorks as an educator and speaker to thousands of accountants nationwide, Lee manages a technical research service for a large group of tax accountants which sharpens his technical skills. Lee served on the Board of Blackline Systems, is a former Board of Director for the California Tax Education Council, is a Past President of the San Fernando Valley Chapter of Enrolled Agents, Member and Past Director for the California Society of Enrolled Agents.

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