Bush budget advances LSAs and 529 reforms
Making permanent the 2001 tax exclusion on qualified 529 distributions has been high on the 529 industry's priority list. Under current law, the federal exclusion expires at the end of 2010.
The proposal for Lifetime Savings Accounts mirror's last year's document. LSAs would be a tax-free savings vehicle accepting up to $5,000 per individual per year, and would be viewed by many college savers as preferable over 529 plans with its many restrictions. Under the proposal, up to $50,000 in existing 529 assets could be transferred to an LSA.
The 529 reforms include the following:
1) Third-party contributions to a 529 account are prohibited, with a possible exception for de minimus third-party contributions.
2) Contributors continue to have the right to withdraw the account and the contribution continues to be a completed gift. However, the 10-percent penalty on nonqualified withdrawals is increased to 20 percent when the withdrawal is made to the contributor more than 20 years after establishing the account.
3) A change of beneficiary triggers no income or transfer tax consequences. However, a 35% excise tax applies to nonqualified distributions in excess of $50,000 (cumulative) to a beneficiary who is not the initial beneficiary of the account. Once the cumulative distributions reach $150,000 the excise tax increases to 50%.
4) Only trustee-to-trustee rollovers are permitted. This restriction is designed to ease verification of the contributor, the initial beneficiary, and the date of creation of the account.
5) The contributor apparently cannot transfer account ownership to another person. However, the contributor could name an account administrator to administer the account.
6) The changes affect only 529 accounts established after the date of enactment. Existing 529 accounts could not accept additional contributions unless they elect to be governed by the new rules.
Click on the link to view the Blue Book explanation of the revenue proposals. The 529 reforms begin on page 120 of the document.