IRS eases investment direction restriction for sec. 529 participants.

• Author: Fiore, Nicholas J.
• Position: Individuals

Under Sec. 529(b)(5), a taxpayer should not treat an educational investment program as a Sec. 529 program unless it provides that any contributor to, or designated beneficiary under, such program may not directly or indirectly direct the investment of any contributions to the program (or any earnings thereon). Under Prop. Regs. Sec. 1.529-2(g), a program does not violate this requirement if it permits a person who establishes a Sec. 529 account to select among different investment strategies designed exclusively by the program, only at the time he makes the initial contribution to establish the account.

Permitting a participant in a Sec. 529 program to select among various broad-based investment strategies offered by a program, both at the time that contributions are made and at certain other times, may be consistent with Sec. 529(b)(5). For example, an investor should be able to change his investment strategy when (1) a significant change in market circumstances occurred from the time he initially established the account, (2) he changes the designated beneficiary of an account (as permitted under Sec. 529 (c)(3)(C)) and the new beneficiary has a different expected matriculation date or (3) the program establishes new investment options.

The IRS recognizes that there are a number of situations that might warrant a change in an investment strategy for a Sec. 529 account. Accordingly, the Service expects that the final regulations under Sec. 529 will provide that a program does not violate Sec. 529(b)(5) if it permits a change in the investment strategy selected for a Sec. 529 account once per calendar year or on a change in the account's designated beneficiary. Taxpayers can expect that the final regulations will also provide that, to qualify under this special rule, a program must (1) allow participants to select only...