|
 Case
of the Week: Underwater 529
by John Carl, President,
Retirement Learning Center
Even 529 college savings plans were not
immune to the historic market losses of 2008. Our ERISA
consultants on the Columbia Management Learning Center
Resource Desk regularly receive calls from financial
advisors who have questions about 529 plan contributions and
rollovers.
Through our relationship with the Columbia Management Learning
Center, we regularly guide
Columbia Management’s financial advisor partners through the
rules and regulations that govern 529 plans.
A recent call
with an advisor in Michigan
is representative of an unfortunate, and more commonly
occurring, 529 plan scenario.
The
advisor’s client had a 529 plan in Alaska
that, as a result of investment losses, was now worth less
than the amount of the original contributions.
Because the Alaska
529 plan was “underwater,” the client was wondering the
following:
1)
Are the 529 plan losses tax
deductible; and
2)
Could
he/she make a cash contribution to another 529 plan (e.g.,
the
Michigan
529)?
Highlights of Recommendations
·
Because claiming a loss can be a
complicated tax matter, it is always a best practice to
suggest a client discuss the issue with a tax advisor.
·
Generally, a taxpayer can deduct a
loss in a 529 plan as a miscellaneous itemized deduction on
Schedule A of IRS Form 1040, provided the following criteria
are met:
ü
The
individual itemizes deductions;
ü
The
total value of the 529 plan is distributed, and the amount
distributed is less than the unrecovered basis in the plan;
and
ü
The
loss exceeds two percent of the taxpayer’s adjusted gross
income.
·
As
previously mentioned, in order to be able to deduct the
loss, the client must fully distribute the account,
and cannot roll over
the amount to another 529 plan.
If a cash contribution of an equivalent amount is
made to another 529 plan within 60 days of the distribution
from the Alaska 529 plan, the IRS
would treat the contribution as a rollover, and the
individual would not be allowed to deduct the loss.
·
The
client would be able make a cash contribution to the
Michigan
529 plan after the 60 days had elapsed, and the amount would
be treated as a new contribution to that plan.
·
Note
also that large miscellaneous deductions can trigger
alternative minimum tax rules.
Conclusion
Losses in a 529
plan can be tax deductible under certain circumstances.
When faced with this
situation, financial advisors should suggest their clients
meet with a tax advisor to discuss the specific
requirements.
For more helpful information
on 529 plan issues, financial advisors can rely on the
expert guidance of the
Columbia
Management
Learning
Center
consultants.
©2010 Retirement Learning Center
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