When is transfer of ownership of 529 plan a taxable event?

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ljb
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Joined: Fri Jun 23, 2017 5:24 pm

When is transfer of ownership of 529 plan a taxable event?

Post by ljb » Mon Jul 31, 2017 9:40 am

I'm trying to research this issue online and not getting anywhere.

I know that the transfer of ownership from one spouse to another spouse that is part of a divorce settlement is not a taxable event. I know that because ex-husband and I did that when we got divorced a few years ago. But what about other transfers, such as to the other parent after divorce? Or to the beneficiary? Or one generation up, to a grandparent?

Again, I'm looking for information about transfer of ownership, not changing the beneficiary.

Does anyone know if the IRS has issued rules on this? I have inquired to the agency that administers Ohio 529 plans, the Ohio Tuititon Trust Authority. If I get good information from them, I will post here. My fear is that 529s are fairly new, and the rules haven't really been established for unusual situtations yet. From a tax perspective 529s are odd, with some characteristics of a completed gift to the beneficiary and some characteristics of an asset of the account owner.

The reason I'm interested is because my ex-husb and I funded 529s for our kids when they were little, but son now has schizophrenia and can't go to college and probably never will. We want to take the money out to to buy him a condo, but that will mean paying income tax on all those capital gains -- ugh. Son is in zero tax bracket, so making withdrawals payable to him is tax-advantageous, but we're wary of doing that because he can't manage money. The grandparents are in lower tax brackets than myself and ex-husb, but I haven't discovered yet what the tax consequences of transferring to them would be.

Topic Author
ljb
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by ljb » Mon Jul 31, 2017 5:59 pm

Well, I was able to find the answer myself and it is more straightforward than I expected. From IRS Publication 970, page 60:

"Rollovers and Other Transfers
Assets can be rolled over or transferred from one QTP to
another. In addition, the designated beneficiary can be
changed without transferring accounts.

Rollovers
Any amount distributed from a QTP isn't taxable if it is rolled
over to another QTP for the benefit of the same beneficiary
or for the benefit of a member of the beneficiary's
family (including the beneficiary's spouse). An amount is
rolled over if it is paid to another QTP within 60 days after
the date of the distribution."

Spirit Rider
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Spirit Rider » Tue Aug 01, 2017 12:10 am

ljb wrote:Again, I'm looking for information about transfer of ownership, not changing the beneficiary.
ljb wrote:Well, I was able to find the answer myself and it is more straightforward than I expected. From IRS Publication 970, page 60:
Actually, your reference and quoted section are vague and do not necessarily answer your question as they are not definitively referring to a change of the account owner and could be just referring to a rollover or transfer to another 529 account with the same account owner and beneficiary or with the same account owner, but a change of beneficiary. Remember IRS publications are considered aids in completing tax returns, but are not considered "substantial authority" in and of themselves when considering matters of tax law.

Unfortunately, the answer is that there is no answer. 26 Code 529 does not even mention the concept of the account owner. There are no finalized 529 regulations. In neither the proposed 1998 regulations or the 2008 Announcement of Proposed Rule Making address this issue. There is no other IRS guidance on this issue at all and to my knowledge, there are not even any Private Letter Rulings.

The problem is that some 529 plans will not allow the change in ownership and will issue the 1099 as if it is a full distribution. To date the general belief is that if your particular plan allows a change of ownership and the plan does not report it as a distribution, the IRS will not question it.

As always and especially in this case IANAL and this is not tax advice. You should consult with your local tax professional.

Spirit Rider
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Spirit Rider » Tue Aug 01, 2017 8:41 am

Spirit Rider wrote:The problem is that some 529 plans will not allow the change in ownership and will issue the 1099 as if it is a full distribution. To date the general belief is that if your particular plan allows a change of ownership and the plan does not report it as a distribution, the IRS will not question it.
I should add some clarification to this statement.

The belief that there is no tax liability absent tax reporting to the contrary is subject to the facts of the account owner, donor and beneficiary(ies) and the and circumstances of the ownership change. Specifically, is the change of ownership intended to avoid gift/income tax liabilities? The fact that it might result in lower tax rates for non-qualified distributions to the new owner should not be a concern. After all, that would be true of non-qualified distributions to the beneficiary without a change of ownership.

The least likely scenario to concern the IRS would be like yours. The facts of an account owned by a parent, the majority or all of the contributions made by the parent(s) and the beneficiary a child of the parents. The circumstances are that the contributions were made early or continually while the child was a minor and for whatever unforseen reason some or all of the contributions and earnings remain in the account. A change of ownership to the now adult child would not likely be a taxable event. The donations were a completed gift to the beneficiary and they are now receiving control of that completed gift.

Rupert
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Rupert » Tue Aug 01, 2017 9:40 am

What happens if the account owner dies and ownership must be transferred to someone else other than the beneficiary who is still a minor?

rkhusky
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by rkhusky » Tue Aug 01, 2017 10:08 am

The wiki has some information:
https://www.bogleheads.org/wiki/529_pla ... _transfers

Ohio is not on the list of states which forbids account transfers, but it would be best to find that information directly from the Ohio plan.

Spirit Rider
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Spirit Rider » Tue Aug 01, 2017 11:31 am

Rupert wrote:What happens if the account owner dies and ownership must be transferred to someone else other than the beneficiary who is still a minor?
You name a successor participant and ownership transfers to them out of probate and income tax free. The amounts in such a transfer are not a part of your estate unless there are unapplied annual exclusions left from utilizing a 5-year lump sum contribution.

Katietsu
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Katietsu » Tue Aug 01, 2017 11:43 am

I believe the 10% penalty is waived if the beneficiary is disabled. The earnings would still be taxed so this does not address your original question.

Normchad
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Normchad » Sun Feb 10, 2019 9:38 pm

I have a similar question, but for a different reason, and am hoping for help or clarification.

We have a well funded 529 plan setup for our one and only child. With scholarships, we won’t need this money for her education. I’ve started taking non qualified distributions this year, and owe tax on the growth. (No penalty though).

I’m thinking about transferring ownership of the account to my child. The thinking being that future non qualified distributions would be taxed at the child’s much lower tax rate.

Thoughts?

momvesting
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by momvesting » Sun Feb 10, 2019 11:38 pm

Is it easier to open a second 529 in his name and then roll the first into the second? I know it isn't the same because we are married, but I had an Ohio plan in my name only and husband had a Utah plan in his name only and I closed and rolled over my Ohio into his Utah with almost no hiccups. The only small issue was I had to hound Ohio to report the cost basis to Utah, otherwise Utah was going to designate 100% of it as earnings.

Spirit Rider
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Spirit Rider » Mon Feb 11, 2019 12:18 am

Normchad wrote:
Sun Feb 10, 2019 9:38 pm
I have a similar question, but for a different reason, and am hoping for help or clarification.

We have a well funded 529 plan setup for our one and only child. With scholarships, we won’t need this money for her education. I’ve started taking non qualified distributions this year, and owe tax on the growth. (No penalty though).

I’m thinking about transferring ownership of the account to my child. The thinking being that future non qualified distributions would be taxed at the child’s much lower tax rate.
It is not necessary to change ownership. Non-qualified distributions are taxable to the recipient of the distribution. If you want the non-qualified distribution to be taxable to the beneficiary just make the distributions to the beneficiary.'

Normchad
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Normchad » Mon Feb 11, 2019 5:37 pm

Thank you Spirit Rider! This had not occurred to me, but sounds like the best answer. I’ll investigate, and if there aren’t any show stoppers, I’ll do it as you suggested.

Spirit Rider
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Spirit Rider » Mon Feb 11, 2019 9:04 pm

26 U.S. Code § 529. Qualified tuition programs, (c) Tax treatment of designated beneficiaries and contributors, (3) Distributions, (A) In general
Any distribution under a qualified tuition program shall be includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of this chapter.

townboglehead
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by townboglehead » Sat Aug 31, 2019 10:54 am

I have a related question, but regards college financial aid for this ownership question. I have two dependants, 19 and 17. We are fortunate to have both 529 and UTMA assets. The UTMA has 28000 with minimal capital gains currently. I plan to move the UTMA to the 529 this year to help shield the UTMA asset from the higher, 20% student vs 5.64% parental owner for the 529, federal student aid calculation. (FAFSA)

I recognize the 17yo custodial 529 will have more restrictions, e.g, must be for educational purposes only now,etc.

Would it make sense to move the ownership of the 19 yo's 529 asset, currently parental, to the 19yo for the same purpose?

HereToLearn
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by HereToLearn » Sat Aug 31, 2019 1:49 pm

townboglehead wrote:
Sat Aug 31, 2019 10:54 am
I have a related question, but regards college financial aid for this ownership question. I have two dependants, 19 and 17. We are fortunate to have both 529 and UTMA assets. The UTMA has 28000 with minimal capital gains currently. I plan to move the UTMA to the 529 this year to help shield the UTMA asset from the higher, 20% student vs 5.64% parental owner for the 529, federal student aid calculation. (FAFSA)

I recognize the 17yo custodial 529 will have more restrictions, e.g, must be for educational purposes only now,etc.

Would it make sense to move the ownership of the 19 yo's 529 asset, currently parental, to the 19yo for the same purpose?
I wanted to suggest that you open a new, separate 529 account to receive the money you are transferring from the UTMA. Otherwise, if you should find yourself with an overfunded 529 (scholarship award, ROTC), and decide to withdraw funds from the 529, all monies will have the same basis.

Since the UMTA money has little gains presently, you will want to segregate those funds.

Spirit Rider
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Spirit Rider » Sat Aug 31, 2019 2:45 pm

HereToLearn wrote:
Sat Aug 31, 2019 1:49 pm
townboglehead wrote:
Sat Aug 31, 2019 10:54 am
I have a related question, but regards college financial aid for this ownership question. I have two dependants, 19 and 17. We are fortunate to have both 529 and UTMA assets. The UTMA has 28000 with minimal capital gains currently. I plan to move the UTMA to the 529 this year to help shield the UTMA asset from the higher, 20% student vs 5.64% parental owner for the 529, federal student aid calculation. (FAFSA)

I recognize the 17yo custodial 529 will have more restrictions, e.g, must be for educational purposes only now,etc.

Would it make sense to move the ownership of the 19 yo's 529 asset, currently parental, to the 19yo for the same purpose?
I wanted to suggest that you open a new, separate 529 account to receive the money you are transferring from the UTMA. Otherwise, if you should find yourself with an overfunded 529 (scholarship award, ROTC), and decide to withdraw funds from the 529, all monies will have the same basis.
You must move the UTMA assets to a UTMA 529 account. The assets are owned by the child and must either be distributed for their benefit or to another UTMA account for their benefit. You can not move the assets from a UTMA to a 529 account owned by the custodian. That would be considered a distribution for the benefit of the custodian.

HereToLearn
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by HereToLearn » Mon Sep 02, 2019 2:44 pm

Spirit Rider wrote:
Sat Aug 31, 2019 2:45 pm
HereToLearn wrote:
Sat Aug 31, 2019 1:49 pm
townboglehead wrote:
Sat Aug 31, 2019 10:54 am
I have a related question, but regards college financial aid for this ownership question. I have two dependants, 19 and 17. We are fortunate to have both 529 and UTMA assets. The UTMA has 28000 with minimal capital gains currently. I plan to move the UTMA to the 529 this year to help shield the UTMA asset from the higher, 20% student vs 5.64% parental owner for the 529, federal student aid calculation. (FAFSA)

I recognize the 17yo custodial 529 will have more restrictions, e.g, must be for educational purposes only now,etc.

Would it make sense to move the ownership of the 19 yo's 529 asset, currently parental, to the 19yo for the same purpose?
I wanted to suggest that you open a new, separate 529 account to receive the money you are transferring from the UTMA. Otherwise, if you should find yourself with an overfunded 529 (scholarship award, ROTC), and decide to withdraw funds from the 529, all monies will have the same basis.
You must move the UTMA assets to a UTMA 529 account. The assets are owned by the child and must either be distributed for their benefit or to another UTMA account for their benefit. You can not move the assets from a UTMA to a 529 account owned by the custodian. That would be considered a distribution for the benefit of the custodian.
Ah...thanks for correcting my error. I know nothing about UTMA accounts, so did not realize that a UTMA 529 even existed. I was thinking of it the same way I think of the two 529 accounts I hold for one child. One account was established a long time ago, and has enjoyed significant gains. The other was funded later, and now may not be needed, but by segregating, each has its own basis.

Thanks again.

Spirit Rider
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by Spirit Rider » Mon Sep 02, 2019 3:20 pm

In case you were not aware. Parental owned 529 accounts and student owned 529 accounts are both considered parental assets for FAFSA assessment purposes.

townboglehead
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Re: When is transfer of ownership of 529 plan a taxable event?

Post by townboglehead » Sat Sep 14, 2019 7:41 am

Yes, aware that this will be a custodial 529 for the beneficiary and will be more restricted in the 529 than the UTMA. Both are considered parental assets and this is exactly what I want. in a UTMA, financial aid for a student asset is calculated at 20% but in the UTMA 529, it would be assessed at 5.64%.
Thanks much

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