My firm has many clients with 529 plans that are currently under water given market conditions over the last few months. We are debating whether to recommend distributing assets currently in 529 plans and then contributing them to another 529 plan after the 60 day waiting period in order to take the loss as a misc. deduction (subject to 2% of AGI).
In potentially doing so, a few questions have arisen that I cannot seem to answer, including:(1) If the client accelerated contributions under the 5-yr. rule within the last 5 years, can they do so again (or on a pro-rata basis) in order to allow contributions in 2009 of up to $120,000?(2) Are there any issues that arise with doing so for multiple plans w/ the same beneficiary but different owners (e.g.; parent & grandparent)? Is it required to distribute both/all assets for a specific beneficiary when the laws follow the taxpayer, not the beneficiary?
Joe, can you please provide guidance on these issues? Thanks!
Laymans take:
I have no clue where/why you think a 60 day requirement applies and there seems to be some confusion as to whom a wash sale rule might apply as the distributee and the beneficiary of the new gift are different parties so you post would suggest.
To best of my knowledge there is no provision to unwrap 5 year rule when gift is unwrapped--for that matter there is no provision to reset the 1 year cap if the gift is unwrapped--there is no guidance on point--other than to say as separate issues--a completed gift is a completed gift therefore it makes no sense to reset the clock-for a final gift-especially if the unwrapper is not the gift recipient---which of course is illogical on other grounds-- and technically property transfer issues are most likley subjects of state law not Federal law and I just gotta bet most states never contemplated massive unwrapping of completed 529 gifts. .
One most certaily can make a new $120,000 gift--its merely that there is no sound basis to suggest if made to same person it is entitled to recycle the $120,000 5 year average exemption. And a massive gift may still be a far more effective asset transfer tool than an estate transfer. That aside--it pays to remember that if you merely pay tuition direct t the institution there is no cap and its not a gift--so if JT get admitted to Harvard you can probably pay 4 years up front of tuition--and hope he doesn't flunk out.
The recovery of tax savings would be a state tax issue.
I'm still at a bit of a loss where for most folks a loss that goes on Sch A that is trimmed by 2%AGI and may be subject to AMT issues is a cost effective route for folks likleyto have high AGI in hte first place unless for the subject year the AGI is a bit more modest and we are talking big time 529 losses.--Its a math issue....and I suspect only a few feet fit the shoes being discussed....
Of course, the IRS hasn't thought through all these issues, or if they have they haven't told anyone yet. My take on it is that a refund of the account does not undo the original gift. If the refunded amount were re-contributed to another 529 plan, then there would be a second gift with essentially the same dollars. If there's no room under the annual exclusion, then this will generate a taxable gift that will use up some of the $1 million lifetime exemption.
I don't see where having the same beneficiary on multi accounts makes any difference. The refund is presumably going to the account owner.
Joe
As I read it a rollover is an affirmative option one can elect--generally used to protect not having gains taxed or issue of a new gift--but if one elects a nonqualified distribution that sort of preempts it being a qualified rollover. The rollover works to preserves tax free status of gains to date. The nonqualified distribution works to recognize for current tax year any losses in plan. The problem I was seeking to side step is that if losses in Plan ABC to tune of $20,000 are recognized is to reinvest in Plan ABC immediately subject to the 30 day wash sale rules. The wiser option of course might be to invest in plan XYZ then chage later if desired. But due to quirky nature of 529s which separate beneficiary from ownership it is quite possible that existing rules which didn't contemplate 529s allow that ws sale rules fo not apply--consider D holds plan for S, D elects a nonqualified distribution to D for purposes of D to show loss, OK so far, D then makes a new gift to S into a new 529 which is same plan--there is actually a separation of who did what--D took loss and S made new investment--not a wash sale situation.
The more mind bending situation is how a donor /owner of a completed gift can take on his account a loss one would think that only the gift recipient should be getting benefit of loss--but the quirky nonqualified distribution rules seem to say its the distributee who has the tax benefit or tax burden /penality to address. Cute, and counterintuitive....
Thanks for the input - Regarding the 60 day rule I was referring to the waiting period to avoid a rollover to another state's plan. In this case, of course, we want the distribution to be a taxable event so the losses can be taken (thus, you must wait 61 days to contribute the proceeds to another 529 plan).
If I understand the law correctly, recapture is only an issue if your 529 is in your state of residence - this is not an issue for my clients.
The reason I advise waiting 61 days is because the wording of the law suggests the treatment of rollover vs. distribution is not elective, viz. if it meets the requirements for a rollover then it is a rollover.
What is not entirely clear to me is the question of whether putting the money back into the same plan from which it was distributed can be a rollover. If it can't be a rollover, then you don't have to wait 61 days, and the 30-day wash sale rule comes into play if you go back into the same investment option.
I do not read the rollover as being mandatory upon distribution and there is no tracing of funds--so if one doesn't want rollover and there are no gift tax issues I don't see where a quick "new" gift--but I do understand the point--and agree--if its 61 days later sort of by definition it cannot be a rollover.
I'm not sure I agree as to wash sale issues inside 30 days. --(aside from safety of 61 day separation) The separation of ownership and beneficairy is not comtemplated in the wash sale rules--and I think there room for debate (wiser to avoid it) Consider if A owns a plan for B ---I'd argue if B is the distributee and B reinvests it in same fund withing 30 days its a wash sale BUT if A is the distributee and B invests new gift or anything else for that matter in same fund its NOT the idential party and hence wash sale doesn't fit. Or conversly if wash sale applies to B then not to A? Hey but wait 61 days and be safer?
in this market for funds, being out of the market is maybe a wise choice?
Whose tax deduction is it really (pardon me if this has been discussed recently, but fantasy football season usually distracts me from visiting this forum for a bit)? I have always maintained that the account "owner" is merely an account "holder", since the bene is the one who actually received the completed gift. Therefore, the BENE is the true owner of said gift which is merely being managed by the 529 account "owner". Thus, logic says that any loss also belongs to the bene--in which case, if the bene has little or no taxable income, said deduction is worthless.
On the other hand, does a non-qualified distribution change conventional wisdom by transering tax responsibility to the account "owner"? The apparent logic is that the account owner is the one who initiated the NQ distribution and presumably pocketed the funds to be re-allocated later, so it follows that said person pays the gain and thus also gets the benefit of a deduction for any loss. So, which is it?
What about a UTMA 529? Here, I would presume this question is moot, as the custodian is clearly removed entirely from any tax repsonsibility and the deduction definitely belongs to the bene (therefore, again, it would thus most likely be wasted). Is this correct?
Finally, what about a QUALIFIED distribution that has a loss (the 529 is used for college expenses, but the investment is down)? So, there is no NQ distribution here with its potentially quirky rules. Now who gets the deduction? Again, if it is the student, the deduction may be worthless (or perhaps carried forward to future years, when it can be further wasted).
No wonder the IRS seems to have its head in the sand when it comes to issuing regulations - they can't figure it out any more than we can. However, don't confuse gift tax treatment with income tax treatment. The gift and estate provisions contained in section 529 apply only for gift and estate tax purposes, that much was made clear by Congress in writing the rules. In the event of a liquidating distribution that produces a loss, it is my own opinion that the tax basis stays with the account owner. If the distribution goes to the beneficiary I would be concerned that the beneficiary would have no right to claim the deduction, not that it would do much good for most beneficiaries, and the account owner might not be able to claim the deduction either.
I appreciate your response here, Joe. Could you, or anyone else, please address all of the possibilities I posed? In short, who gets to report the deduction for a loss incurred by a 529 distribution under the following scenarios?:1. Non-qualified distribution from a regular 529 account2. Non-qualified distribution from a UTMA 529 account3. Qualified distribution from a regular 529 account4. Qualified distribution from a UTMA 529 account
I think Joe answered #1, that the owner gets the deduction. What about the other cases? Thanks.
(I can't believe we're even having this discussion, but that's how it is nowadays)
Hello? Anyone? Joe? Buehler? Buehler?
KISS. Who gets the initial tax benefit, gets the final tax benefit. This prevents a lot of tax evasion/avoidance problems. IMO. Seek exact determination but my interpretation is owner gets the tax benefit coming and going, based on many levels.
Not all clear everyplace:
Some would say the distributee gets the tax impact--and under state rules the distributee could vary to include either owner or beneficiary (if not one and the same)
And its possible that donor gets some state income tax breaks even if he is not owner
BTW if somebody dies you can run into some awfully quirky state rules as to inheritance tax issues
Here is what IRS Publication 970 says. It doesn't answer all your questions. It would have been much more helpful if "Taylor" had been identified as either the account owner or the beneficiary - Joe.
Nothing in the law triggers wash sales to transactions BY related parties and we are not talking about sales TO related parties which do come under wash sale rules. So we are back to unclear stuff (which may be wiser to avoid than it is to debat) Its perfectly unclear to me if A creates a 529 for B and funds it whether the actual buyer of the underlying instruements is A or B and thats should be an issue of state law which I'll bet is perfectly unclear most places. But lets assume the buyer is B by operation of law, and if A makes a nonqualified distribution to A then a new purchase of same instruement by B is not in scope of wash sale! (Unless A and B are married which is uncommon with 529's) Lot cheaper to avoid problem than to debate it with tax counsel at $400/hr?
I am underwater on my 529 by about $79K in 2008. This is a 2008 loss. Can I take the loss from the start in June of 2007? This loss of course would be greater. I cashed it in, December of 2008. Can I carry forward any part of this loss? daw
Edited by daw (Yesterday at 02:49 PM)