You can use 529 plan for tax-free savings

February 10, 2012

Discover the benefits and pitfalls of a 529 investment plan.

Q. I am a 40-year-old doctor not planning to go back to school. I have a 529 account that I like because it's tax-sheltered. Even if I don't use this money for education expenses for myself or my kids, I think the account is a good deal. Your thoughts?

A. These plans are not just a good deal, they are a great deal, but with a few cautions. Most estate-planning tools remove assets from the estate and leave little control over investments and beneficiaries. The 529 plans, however, allow their owners to change investments and beneficiaries every year. If you are not satisfied with the investment options in your existing 529 plan, you can complete a rollover to another 529 plan, as long as you limit yourself to one rollover every 12 months for the same beneficiary. But you can avoid even this limitation simply by changing the beneficiary at the time of the rollover.

Distributions from a 529 plan are not taxable if they are rolled over to another 529 for the benefit of the same beneficiary or a family member of the beneficiary (including the beneficiary's spouse). Of course, you can be the owner and beneficiary of the same 529 plan. Family members include, but are not limited to, sons, daughters, brothers, sisters, mothers, and fathers.

Answers to our readers' questions were provided by Aaron Skloff, AIF, CFA, MBA, chief executive officer of Skloff Financial Group, a New Jersey-based registered investment advisory firm. Send your money management questions to medec@advanstar.com

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