Close Close

Financial Planning > College Planning > 529 Plans

Get Your 529 License, and Quick

Your article was successfully shared with the contacts you provided.

Sales of 529 college savings plans have been phenomenal since Congress added Section 529 to the U.S. tax code six and a half years ago. As of year-end 2002, investors had plowed $20 billion into 529 plans, a significant jump from the total $9 billion invested in these plans as of the beginning of 2002.

While industry professionals are certain that 529s will continue to grow in popularity, they’re uncertain as to when the Internal Revenue Service (IRS) and the Department of Treasury will issue final regulations on 529s. David Pearlman, VP and associate general counsel at Fidelity Investments, told attendees at the Securities Industry Association’s (SIA) 529 Plans Conference in Washington, D.C., in January not to hold their breaths that the IRS and Treasury will issue final regs by the June 30 deadline.

Joe Hurley, CEO of, says the IRS and Treasury are still trying to decide how to regulate certain aspects of 529 plans, “especially in the gift and estate tax areas.” Hurley says the IRS and Treasury have been addressing questions about 529s on an ad hoc basis, and via notices and general rules in the 529 tax form, Publication 970.

“The 529 product area is relatively new, and it’s going to take some time before everything gets fleshed out,” says Fern Gartenhaus, second VP and 529 product manager for New York Life Investment Management (NYLIM). One thing is for sure, though. The MSRB now wants broker/dealers–independent ones, those working for wirehouses, as well as investment advisors–to take its new 529 exam by the end of March if they want to sell 529 plans. As of April 1, those brokers holding only the Series 24 and 26 licenses will not be allowed to sell 529s. They’ll either have to hold a Series 53, the municipal securities principal exam, or the MSRB’s new Series 51 limited principal exam. Brokers and advisors “need to make sure someone in their shop takes this test,” Hurley says. The Series 51 exam has been available since January 2, and is administered through NASD’s Proctor system.

Fidelity’s Pearlman said there’s a host of questions the IRS and Treasury need to address in the final rule. One is, who can be a contributor to a 529 plan? “Can your beneficiary?” he asked. The IRS “now permits someone to set up an account for themselves,” Hurley adds. Another issue is contribution limits. Right now, there’s no formal contribution limits on 529 plans, although some states permit contributions in excess of $250,000, Pearlman said. And what about penalties for participants who over contribute to a plan just to reap the tax deferral benefits? The IRS says a penalty “should solve the problem of over-funding,” Pearlman said. But Hurley says it would be “very difficult for the IRS to police” over-funding of a 529 plan. There’s already a natural deterrent to putting too much money in, he says, which is “the high tax costs down the road.”

Another issue is whether the IRS should allow more than one rollover of a 529 plan to another state’s plan per year. And what about how to treat losses on the new 1099Q tax form? The treatment of losses on 1099Q forms differs among states. “What happens if you roll over an account that has negative earnings?” Hurley says. “The IRS came out with a notice that talks about rollovers when you have earnings and what kind of requirements there are on the receiving plan and on the plan that’s issuing the 1099Q. But what happens if there are negative earnings? The IRS has informally said that if you have negative earnings you can increase your basis over the amount of the rollover, but I don’t think that’s applied consistently across 529 plans.”

Another conundrum is the fact that the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) “blows itself up in 2010,” Pearlman said, which means, among other things, that the exclusion of 529 plans from federal taxation expires in 2010.

Beverley Moore, managing director retail markets for NYLIM, says she’s worried advisors “are not pressing their clients to put enough away” in college savings plans. “It’s the responsibility of [advisors] to understand the choices [of various state plans] and how they compare and contrast with other state plans,” she says, because “529 plans are sold, not bought.” NYLIM recently added asset allocation options to its 529 plan, CollegeSense, that “can change as the child gets older,” Moore notes.

Washington Bureau Chief Melanie Waddell can be reached at [email protected]