Tax Extenders Bill Adds Investment Flexibility to 529 College Savings Plans

The Tax Increase Prevention Act of 2014 (P.L. 113-295) changed the rules for 529 college savings plans and other qualified tuition programs to allow limited investment direction. Previously, contributors and beneficiaries of 529 college savings plans were not permitted to directly or indirectly specify the investment of the 529 plan’s contributions and earnings. Effective January 1, 2015, contributors and beneficiaries may directly or indirectly select the investments of the 529 plan up to two times per calendar year.

Although Congress may have intended to allow account owners to change the asset allocation in a 529 college savings plan twice a year, this amendment may also allow 529 plan owners to invest in individual stocks and bonds, not just a limited selection of mutual funds.

A similar investment direction provision was included in the definition of qualified Achieving a Better Life Experience (ABLE) programs, which are new state savings programs established under section 529A of the Internal Revenue Code to provide for the care of family members with disabilities. Contributions to and qualified distributions from an ABLE account, as well as the assets and earnings in the ABLE account, are disregarded in determining eligibility for federal student aid, among other federal means-tested benefit programs.

The tax extenders legislation also retroactively extends the tuition and fees deduction for another year, through the end of 2014. The tuition and fees deduction provides an above-the-line exclusion from income for up to $4,000 in college tuition and required fees.

The Tax Increase Prevention Act of 2014 passed the U.S. Senate on December 16, 2014 by a vote of 76 to 16 and the U.S. House of Representatives on December 3, 2014 by a vote of 378 to 46.

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