ook out! College savings plans may become popular if President Bush's 2004 budget is passed as proposed. But that popularity may be brief and hurt 529 providers more than it helps them. Hidden inside the retirement account provisions is a temporary provision that would allow 529 account holders to roll their accounts into a Lifetime Savings Account (LSA).
The surge in assets could come from investors taking advantage of the loophole to bypass the $7,500 contribution limit on LSAs. It works like this:
Open a 529 with up to $100,000 as the initial deposit. (Amounts greater than $100,000 would trigger gift taxes).
Roll the 529 into an LSA and immediately close the 529.
Voila, the investor has funded an LSA with $100,000 and the 529 provider has a paperwork headache. Whether the 529 provider still has the assets is another question altogether. Under the proposed budget, the loophole would be open for 12 months.
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