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IRS adds more flexibility to tax-free Sec. 529 plans

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in Leaders & Managers,Management Training,Small Business Tax,Small Business Tax Deduction Strategies

If you’re one of the 11 million account holders who have more than $120 billion invested in tax-free Sec. 529 plans for a child’s or grandchild’s college education, we’ve got good news about investment options.

A new IRS ruling allows you to change your investment mix up to two times during the 2009 calendar year. (IRS Notice 2009-1) Another change is permitted anytime you switch beneficiaries.

The new ruling supersedes a prior edict limiting investment changes to just once a year. (IRS Notice 2001-55)

Strategy: With the recent stock market slide, this may help you adapt to changing market conditions.

Here’s the whole story: A Sec. 529 plan is a savings program operated by a state (or associated agency) or one or more educational institutions. If you meet certain requirements, there’s no tax on the contributions to the plan, no tax on the accumulation of earnings and no tax on distributions when the funds are paid out.

If the plan beneficiary completes school—or decides not to attend college or leave early—you can roll over the assets tax-free to a different beneficiary.

The plan generally offers an asset-allocation strategy geared to the current age of the child or the year he or she will enter school. Example: The plan may provide more aggressive investments in the early years and switch over to more conservative investments as the time for entering college approaches.

Initially, proposed regulations issued in 1998 allowed you to choose a basic investment strategy, but only at the time you established the account. The subsequent 2001 Notice permitted a revision in investment strategy once a year in addition to allowing a change when you switch beneficiaries.

The new ruling gives investors more flexibility. You can change your investment strategy twice in 2009 if it suits your needs. This new ruling was precipitated by concerns that current stock market conditions could imperil many Sec. 529 accounts. The once-a-year limit will be reinstated in 2010.

Tip: Forthcoming final regulations will incorporate this break for 2009, but you can rely on the IRS guidance in the meantime.

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