IRS Eases Investment Direction Restriction for Sec. 529 Participants

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 from among broad-based investment strategies designed exclusively by the program and (2) establish procedures and maintain appropriate records to prevent a change in investment options from occurring more frequently than once per calendar year or on a change in the account's designated beneficiary. The IRS believes that permitting a change in investment options once per calendar year or on a change in designated beneficiary should provide sufficient flexibility to address most concerns.

Sec. 529 programs and their participants may rely on this notice, pending the issuance of final regulations under Sec. 529.

Note: The Service invites comments on the matter in this notice and any other comments relating to Sec. 529, including the amendments made by the Economic Growth and Tax Relief Reconciliation Act of 2001. Written comments should be sent by Dec. 24, 2001 to: CC: ITA:RU (Notice 2001-55), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to CC: ITA:RU (Notice 2001-55), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington DC. Alternatively, taxpayers may submit comments via the Internet by selecting the "Tax Regs" option on the IRS Home Page (www.irs.gov), or by submitting comments directly to the IRS Website at www.irs.gov/prod/tax_regs/regslist.html . The IRS will make the comments available for public inspection.

Notice 2001-55, IRB 2001-39