529 plans are special accounts authorized by their eponymous section of the Internal Revenue Code, “sponsored” by the states and administered, with some exceptions, by Upromise Investments.
I am going to tell you five facts about 529 plans:
- Depending on the plan, you can contribute up to $511,758 in after-tax income per designated beneficiary (some states have much lower caps);
- Contributions are excluded from your taxable estate;
- You can designate yourself as a beneficiary;
- You can open plans in multiple states;
- Plans are inherited tax-free.
Knowing all that information, the only possible conclusion you could reach was that this is a scam to transfer wealth between generations tax-free.
Now, it happens to also be true that this scam was foisted on the American people with “college affordability” branding. Taking money literally means looking through that branding and seeing how these plans work mechanically.
Contributions are made after tax and appreciate tax-free
In this way, 529 plans are similar to Roth IRA’s. However, Roth IRA’s have strict limits, including an annual cap on contributions. It’s possible to game those limits by “contributing” improperly-valued or hard-to-value assets (Mitt Romney’s IRA had a value over $20 million when he ran for President, leading some to speculate he had done this), but they are at least a gesture at limiting the cost to taxpayers of shielding the assets of the wealthy from capital gains taxes.
529 plans have contribution limits set by the plan administrators to approximate the “maximum cost” of attending college in the sponsor state. That amount can be contributed to the account all at once, and in fact if the investments in the account go down in value, even more money can be added.
Contributions are treated as federal gifts to the beneficiary
Most articles about 529 plans go to great pains to explain the annual tax-free gift limits ($14,000) and the lifetime gift tax exclusion ($5,450,000).
This is nonsense. You can designate yourself as the beneficiary of your own 529 plan, and “There are no tax consequences if you change the designated beneficiary to another member of the family.“
529 plans are inherited tax-free
When a 529 plan owner dies, the account gets a new owner but since the value of the plan is treated as part of the beneficiary’s estate, it’s not taxed. At all.
You might ask, “Ah hah, Indy, now I’ve got you! That means that if the beneficiary dies unexpectedly the 529 plan will be taxable as part of their estate!”
Nope. The owner just gets to designate a new beneficiary.
I’m sure the IRS doesn’t love it when people do this
That’s what lawyers are for.
If you think “maybe the IRS will frown on this scam” stops wealthy people from leveraging the language of the tax code to the maximum extent possible, I’ve got a $916 million deduction to sell you.
It would be trivially easy to identify and penalize the people taking advantage of this scam. The IRS budget has been cut 17% since 2010. Maybe estate tax avoidance is an enforcement priority for the IRS. Maybe they sometimes catch people doing this. Maybe the wealthy know that shielding $2 million is “safe” and shielding $10 million is “risky.” The federal estate tax rate is 40%, making that a “mere” $800,000 in taxes avoided.
What about restrictions on withdrawals?
Are you talking about “qualified education expenses?” Forget about it.
First of all, contributions are always free to withdraw. There’s no tax or penalty if the value of the account is the same as the value contributed or below. Since the wealthy are using these plans as tax shelters, not investment vehicles, contributions could just be left in cash for simplicity’s sake.
Second of all, paying for education expenses for future generations is largely the point of intergenerational wealth transfers; I gather it’s the central conceit of “Gilmore Girls.”
529 plans were a bad idea, are a bad idea, and will always be a bad idea
“The problem” is not high contribution limits, it’s not being able to designate yourself as a beneficiary, it’s not tax-free inheritance, it’s not being able to change beneficiaries, it’s not being able to make penalty-free withdrawals of contributions, it’s not limited IRS resources.
“The problem” is that it’s a bad idea to allow people to shield their assets from taxation when sold or transferred.
This has nothing to do with college affordability because 529 plans have nothing to do with college affordability, just like HSA accounts have nothing to do with health care affordability and the mortgage interest tax deduction has nothing to do with housing affordability.
They are all just branding used by the wealthy to shield their income and assets from taxation.
The only question is, how long are we going to put up with it?
You are on to us!! Great blog headline, good read.
Cheers,
PedroNY
Had no idea these plans were such a scam. Who do you recommend I contact to set up a few dozen plans?
Mser,
Start with UESP, they’ve got great low-cost Vanguard funds and low maintenance fees.
—IF
So….are you saying they’re a “bad idea” for our country? Because they seem like a pretty decent retirement investment account….no?
Ben,
Yes, they’re a bad idea for our country.
—IF
Good read – the tax free inheritance seems similar to a roth, why not just use that vehicle? Well i guess income limts that the super wealthy wont fit into but 98% of us will.
Mike,
Correct, the super-wealthy use this vehicle because there are no age or income limits and very high contribution limits.
—IF
The amount contributed to a 529 can’t exceed the gift limit, so it is no different from an outright gift. Except that the owner retains control, which is why it is oreferable to an UGMA/UTMA or ESA. There is no new magic here.
There is no estate tax because the gift was made prior to death under the lifetime exclusion. The exception is if the owner chose the five year lump sum for contributions and that time period is not up. Then the excess must be taxable or included in the estate. The earnings are still subject to possible taxation if not used for qualified expenses (possibly also a penalty).
There is no cash option for investment. Every state has different options (if they even offer a plan) and they are target date investment funds. Vanguard, T Rowe, Fidelity and American Funds are typical sponsors/administrators for these plans. There is risk to principal and the expense ratios can be high.
A beneficiary can only be changed by the owner to a family member as the IRS defines family. If you do not designate a contingent owner or one can’t serve, the beneficiary will become owner at your death.
Prepaid plans like the one in Maryland are a much better deal for many folks.
I am curious as to the calculations you are using if your position is that there is a great pot of money being hidden from taxation. The large gift limit, including the estate tax limit is a concern, but it does advantage 98% of the Public.
I would think railing against the ridiculously high SEP or 401k limits would be a larger taget for your concern.
Dave,
You are wrong about this for reasons I make clear in the post. Your 529 plan may not have a cash investment option; many if not most do.
—IF
You are posing an argument for which I can find no support. That is why I was asking for some “back of the envelope” math to see your point.
I don’t have any 529 accounts, but I worked in the industry for 25 years and have seen a few of these plans in action. I tried never to drink the Kool Aid and consider myself a skeptic on most schemes. Financial laws are written by and for the benefit of the well-connected, Wall Street in particular. These plans benefit the fund companies mostly.
Don’t mean any offense, just trying to see what the fuss is about.
I look forward to your analysis of HSA as well.
Dave,
Here is the back of the envelope math: HNW individual contributes $430,000 in after-tax money to the Utah Educational Savings Plan (the maximum allowed), in an account owned by himself and designating himself as a beneficiary. Note that this is possible before a child is born. There’s no requirement to have a child before opening a 529 plan. UESP offers low-cost Vanguard investment options, so the HNW individual splits the money 65/35 into Vanguard’s US total stock market and Vanguard’s total international stock market. When the HNW individual has a child, they redesignate the child as the beneficiary of the account, although this is not strictly necessary for the scam to work. The money grows for 40 years never being touched, becoming $4.4M when the HNW individual dies. The money is inherited tax-free, saving $1.76M in estate taxes and reducing the amount of money available to fund the federal government, including real educational affordability programs, by the same amount.
As I explain in the post, “You can designate yourself as the beneficiary of your own 529 plan, and “There are no tax consequences if you change the designated beneficiary to another member of the family.“”
The transfer tax is avoided by the HNW individual designating himself as the beneficiary of the account, since there is no gift tax on “transfers” to yourself, then designating a child or spouse or anyone else within their immediate family as the beneficiary.
If there is something you think I am wrong about, point it out, but the “support” for my “argument” is that this is how the plans work.
—IF
I will do a little research. Thank you for an example to work on.
Initially, my first thought is that there would be no Federal estate tax on that size estate. Currently the exclusion is $5.45 million. You mentioned Federal, so I assume you are not referring to a soecific state inheritance tax.
Is your point that the 529 funds are just an excluded part of a larger estate?
The IRS has already issued some internal memoranda that speak to possible abuses of section 529 QTP. Additionally, it is a violation to create a shelter whose only purpose is the avoidance of taxes.
If you change the beneficiary to another party, that reduces your lifetime exclusion and makes more of your estate subject to estate tax (does it not?)
I’m not in favor of shelters and believe the current exclusion is an unnecessarily large freebie. Particularly since much of an estate may include untaxed capital gains.
Dave,
Yes, we are talking about excluding (in this example) $4.4M as part of a MUCH larger estate. In other words, the entire $4.4M would be subject to the estate tax since it would be in addition to an existing estate of $10M, $50M, $500M. The very wealthy are obsessed with MARGINAL tax rates and excluding this amount of money from a MARGINAL estate tax rate of 40% is a no-brainer.
—IF
Unlike carried interest, offshore accounts, and other tools of the rich-person’s trade that are out-of-reach to the everyday person, at least this one is available to anybody, should they choose to use it in this fashion. Your ire is justified, but the 529 should not be your target
SeeIt,
The “everyday person” doesn’t have a $5.25M taxable estate.
—IF
Counterpoint: My wife and I have 2 kids. Over 10+ years we have saved enough for 4 years of in state education (we wouldn’t qualify for need based aid). We received a 7% state tax break on the contributions and the funds have grown well, tax-free, with Vanguard low fees.
MD,
That’s the “college affordability” branding that the rich use to foist these scams on the American taxpayer. The cost of shielding the wealthy’s estates, and capital gains, from taxation is paid by everybody, including you. How much of the benefit of these scams has to go to the ultra-wealthy before the middle class says enough?
—IF
You say “529 plans have nothing to do with college affordability “. This statement is an exaggeration because in my case it does. Perhaps your main point holds true; just not in your extreme phrasing.
Md,
You are correct, it is legal to use 529 plans to save for college. In fact, the people who are taking advantage of the plans to shield millions from estate taxes are counting on enough middle class people to use them “as intended” to create a public outcry when people try to rein them in: http://www.usnews.com/opinion/blogs/opinion-blog/2015/02/02/obama-proposal-to-tax-529-college-savings-plans-was-a-major-misstep
Note that in that article 70% of the NUMBER of accounts are owned by people making less than $150k. That creates a huge political constituency for a program where the other 30% of accounts (people making more than $150k) hold the overwhelming majority of assets.
—IF
Cool, cannot wait to use this. Thanks for the tip.
ed,
I work for you!
—IF
Always enjoy these Conspiracy discussions where the RICH are scamming us POOR. Always the mean and selfish RICH taking advantage of the good everyday tax payer.
WHINE ON, (or maybe review why the 529 was designed and the benefits that have accrued from them.
IGNORANCE is the ally of of the conspiracy crowd. Did you hear about how the 9-11 attack was really carried out by the US government?…
Michael,
I’ve got to say that this post is one of the most educational and informative post on the topic of 529 plans that I’ve read. I don’t think whining or ignorance are at play here fella.
Best
Matt
Hey shocker that this would be your response.
This is one of those situations where you don’t really understand the topic that is being discussed. It’s OK to listen more, and learn more.
Why not just figure out a way to force universities / colleges to make higher education more affordable? Clearly you are against the 529 plan, fair and peace. But the fact remains, undergraduate and graduate education is quiet expensive, as you probably know, given your degree.
Trevor,
Absolutely. Every program, whether it’s 529 plans, American Opportunity Credit, deductibility of higher ed expenses, whatever, has a price in foregone tax revenue. Hiding these programs in the tax code is a way of hiding that price so people don’t say, “is that the right way to spend $1B to make higher education affordable?” And in fact, it’s absolutely the wrong way to make higher education affordable.
—IF
@FQF / IF (lol) – I’d say the exact same thing about health care. But I’m not sure that I agree with your position on tax revenue. It shouldn’t have anything to do with taxes. It should have every thing to do with prices reflecting cost, and if costs are too high, then there should be pressures to reign cost in. There are some industries where costs have to be high (e.g. cutting edge development), and those might make sense to consider for taxpayer investment; but, wouldn’t it be more advantageous to have costs as reasonable, rather than using subsidies/tax breaks/etc, to make them affordable for those with the means to maximize?
Trevor,
Higher education financing is a very important topic that I’m planning to spend more time on, maybe a lot more time on, here. The point my comment was making is that however much money we decide as a nation to spend on higher education affordability (we might decide $0 is the correct number), the tax code is the wrong place to hide that expenditure. The tax code should be used, through a highly progressive rate structure, to raise money to fund the functions we think the government should be performing. Hiding expenditures there (in this case the taxes on dividends and long term capital gains the rich are shielding their wealth from in addition to the estate taxes they’re avoiding) means people don’t get to openly assess the costs and benefits of a given government activity.
—IF
If people want to make college more affordable then the student loan system needs to be reformed. We have a massive student loan bubble that will eventually pop. I know of no other type of loan where people are allowed to pile on debt with pretty much no regard for income or ability to repay. To top it off, it is very difficult to discharge such debt in bankruptcy. With so much “free” money sloshing around is it any surprise that the price of tuition is spiraling out of control? One suggestion would be to allow debt above a certain limit(adjusted for inflation) to be discharged in bankruptcy court. Effectively, that would put a cap on the amount of debt a student can take on. Allowing people to take on what turns out for many to be unsustainable debt loads makes no sense.
You’re main argument is that this is bad because the rich take advantage of it. And you say that this outweighs the benefits for non-rich people to use as “intended” for college education. Wouldn’t a compromise be to put limits on this so that the super rich don’t have a vehicle for tax avoidance but middle class people still get the benefit.
You’re welcome to your opinion. But you usually have a better chance of getting your point across if your offer positive solutions. This comes across more belligerent.
Ben,
Sure, you could put income limits on it, age limits on it, restrict the transferability of accounts, you could do all sorts of things to “address” my specific concerns about this scam, but they would do nothing to address the basic principle that manipulating the capital gains tax rate paid on investment income is a screwy way to address college affordability. So screwy, you should wonder if that’s really the goal…
—IF
My family will never come close to the 5 mill lifetime gifting limits. But we’ve got some money that is cheapest if taxed under my son’s ownership (10%) versus about 24% if held in a trust, versus 35-45% if in my name due to the loss of my EIC. If I put money in a 529 plan in my son’s name, can he change the beneficiary to myself, or his grandma, in the future and then can we withdraw up to the original amount deposited for non-education expenses? Or if we deposit more in a 529 plan for my son’s actual college expenses than is used, can the balance be withdrawn for non- college expenses after graduation? Once in a 529 plan, aren’t the monies stuck to be used for identified college expenses? Expecting to qualify for state aid for my son’s college as well, but not sure how much.
Great article. Very informative! I was thinking recently that the same holds true for trusts- tax avoidance scam. Not that I won’t avoid taxes if I can, but it’s not fair to all the folks that don’t figure these mechanisms out.
For the family,
Once you have any earnings in a plan, any withdrawals are pro-rated as coming from both contributions and earnings. The contribution portion isn’t taxed, the earnings portion is.
If you want to use 529 assets for college expenses it’s important that the person going to college not be the owner of the account. If the parent is the owner the assets are weighted much lower when calculating financial aid than if the student is the owner (you can look up the exact numbers online).
—IF
Hello,
Thanks for the informative article. I have a question that I haven’t been able to find an answer to. Maybe you can help.
Let’s say I contribute $100 to a 529 plan, which over time earns $10. I then have $10 in Qualified Expenses, and withdraw $10 from the 529 for those expenses. Can I later withdraw the remaining $100 (the amount I contributed) without incurring taxes or penalties?
If I can, couldn’t I use a 529 as a type of Roth – where earnings must be used for education instead of retirement (to remain tax-free), but the principle remains after-tax and penalty-free?
Thanks.
Steve,
No, any contributions and earnings are withdrawn pro-rata from the account’s balance. There are many ways to make penalty-free withdrawals, however.
—IF
The IRS is already aware of this issue.
https://www.irs.gov/irb/2008-09_IRB/ar17.html
Note that the IRS has threatened to make any regulations retroactive and yes they can do that. I am sure this does not deter some people but sometimes unfortunately these tax avoidance schemes go on for a while until the IRS finally cracks down and you see some splashy headlines about a big IRS enforcement sweep.
The overall audit rate has dropped but the IRS usually concentrates resources on areas that get the most bang for their buck. They also launch pilot audit programs all the time concentrating on specific areas looking for areas of abuse and if enough revenue is generated they pour more resources into it.
There are relatively few taxable estates especially with the new limits and estate audits on average often generate the most revenue per man hour so the audit rates are high. I have seen statistics that the audit rates exceed 25% for larger taxable estates.
Bottom line, section 529 is not meant to be a way to avoid gift or estate tax.
Dan,
Anyone who has an estate large enough to be taxable has a tax attorney good enough to give them a tax advice letter to rely on.
—IF
Your reply indicates to me you are not a tax professional. Do you remember Wesley Snipes? He went to jail even though he claimed he relied on tax professionals and they went to jail for an even longer time than he did. Do you really think a good tax attorney is going to write such an OPINION knowing that the Treasury Department clearly considers what you outlined in your post to be abusive? Proposed regulations do not have force of law but they indicate how the IRS would treat the subject under audit. You probably would end up in Tax Court and I would not want to bet on you winning.
Why does it matter if they have an estate large enough to be taxable? Why does that matter to take participate and reap the benefits?
Re-read his article and/or look at the IRS link I provided. The ability to designate oneself as a beneficiary as well as switch account owners and/or designated beneficiaries coupled with the fact that 529 plans are not included in a decedent’s taxable estate opens an avenue of abuse amongst others. Naturally, there are provisions of 529 plans that people with fewer assets can take advantage of as well but the higher your income and the bigger your estate is the more you stand to potentially benefit. Virginia in 2016 had 4 of the rich counties in the US last year. I saw a stat somewhere that supposedly over 20% of 529 assets are in Virginia plans. I think 8 states account for over 50% of assets. Shocking? Not at all. Suffering from insomnia? Here are some slightly dated stats from the federal reserve
https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/saving-for-college-and-section-529-plans-20160203.html
Thanks.. So if you don’t have an estate that would be hit by federal or state estate taxes, and no heirs, there isn’t a way benefit from this, correct?
S,
Correct, this is only a method of evading the federal estate tax.
—IF
If the “contributed dollars” versus “growth dollars” characterization remains intact with ownership transfer, then this seems to be a route to get money out of a child’s name before they turn 18. Generally it seems to be simply for those that have estates greater than the 5+million lifetime allowance, but for folks that put money into a custodial child’s account that then want to remove the money in large quantity, it seems they could transfer it to a 529 with the minor as the beneficiary, and a parent or grandparent as the 529 owner, then take the unqualified withdrawal to the adult 529 account owner. They’d get the 10% penalty on growth dollars, but they could get their money out. And in rare cases, like mine, that 10% penalty, on top of the 1099Q income that is developed, my taxes would still be lower than say an alternative of Trust rate taxes. I’m presuming here that 1099Q income does not cause exemption at more than $3,400 from EIC, as it is not Interest, tax-exempt interest, dividends, or capital gains??
That’s a great find those IRS guidance. Yes these are great as they are like an irrevocable trust where you have geat beneficiary flexibility and the blog post is awesome on that point. However your going to have tax issues if you change a bene to a lower generation or to a non family member. I doubt any tax professional who can appear before the IRS would say otherwise. If you still don’t believe it’s would be awesome to have a comment from Tax Prof blog.
On a side note be careful of state taxes on these weird this exists! http://lawprofessors.typepad.com/law_econ/2015/01/since-we-seem-to-be-stuck-with-529-plans-lets-fix-em.html
The main premise of the blog post would be moot if the IRS had actually gotten around to issuing at least temporary regulations along the lines of what it proposed. As it stands, eight years later the IRS has done nothing despite receiving plenty of comments on its proposed rule making. One could argue that the lack of follow up by the IRS is an indication that 529s are a scam as the article contents but then again it’s the IRS. Some things just take forever with them. If they thought enough money was at stake they might move faster. Until more evidence to the contrary I look at this as a code section that was intended to be what it claimed to be but was poorly thought out. As to whether 529 plans should exist at all well that is another discussion.
I don’t know why you think changing the bene isn’t a taxable event.
http://www.fa-mag.com/news/avoiding-section-529-plan-pitfalls-6204.html
Shonuffharlem,
That’s cool that lady has that complicated theory about changing beneficiaries, but as I linked to in the post, the IRS disagrees: https://www.irs.gov/uac/529-plans-questions-and-answers
—IF
Are you sure that the new beneficiary inherits the same characterization as the original owner as it relates to “contributed dollars” versus “growth dollars”? Without the dollar characterization transferring, the new beneficiary will get nicked for taxes and penalties when they inevitably try to withdraw the funds for non-educational use, no?
Granted, this still provides for tax-free education dollars of HNW heirs and your point is still made overall.
I know you cite an IRS FAQ on the matter of changing the beneficiary of a 529 to a different family member, but when you compare that to
1) the actual US Code
2) Numerous sources of content on the Internet concerning this action,
I have reason to believe that your claim is incorrect IF the new beneficiary is of a lower generation, EVEN IF the new beneficiary is a family member. Now of course, I’m neither an account nor a lawyer, so I could definitely be wrong. But here’s the US code snippet for you, taken from https://www.law.cornell.edu/uscode/text/26/529
(5) Other gift tax rules For purposes of chapters 12 and 13—
(A) Treatment of distributions
Except as provided in subparagraph (B), in no event shall a distribution from a qualified tuition program be treated as a taxable gift.
(B) Treatment of designation of new beneficiary The taxes imposed by chapters 12 and 13 shall apply to a transfer by reason of a change in the designated beneficiary under the program (or a rollover to the account of a new beneficiary) unless the new beneficiary is—
(i) assigned to the same generation as (or a higher generation than) the old beneficiary (determined in accordance with section 2651), and
(ii) a member of the family of the old beneficiary.
My interpretation here is the change of beneficiary to one of a lower generation is not exempted from the gift tax.
Yes and all the tax advisers I could find online with public articles agree with you. An FAQ is not reliable.
Shonuffharlem,
Nothing could be less surprising than tax planners not publicly announcing they do this on behalf of HNW clients. That would put a target on their clients’ backs.
—Indy
And if you want another source, taken from https://www.irs.gov/irb/2008-09_IRB/ar17.html .
Section 529(c)(5)(B) provides that the gift and GST tax apply to a transfer by reason of a change in the DB of a section 529 account (or a rollover to the account of a new DB) unless the new DB is both: (1) assigned to the same or a higher generation (determined in accordance with section 2651) as the former DB, and (2) a member of the family of the former DB. The statute does not identify the individual who would be liable for the gift and/or GST tax in such a situation.
Where DB = designated beneficiary and GST = generation skipping transfer
Fiby,
Thank you for providing a link to an IRS source! So now we’ve come to an agreement that the IRS has provided conflicting guidance.
Here is the Fidelity beneficiary change form. Fidelity is using my interpretation of the rules.
If you go back and read the original post you will see that I happily acknowledge that the IRS probably frowns on this. To summarize our disagreement: you think the IRS frowns on it and aggressively enforces rules against it, I think the IRS frowns on it and the wealthy do it anyway in consultation with their lawyers and estate planners.
—Indy
Conflicting guidance is certainly an issue. But ultimately, at the end of the day, the taxpayer is held to what the US law says, not what IRS guidance says. The IRS has certainly published incorrect guidance in the past, and taxpayers have argued successfully against the IRS in courts. The courts decide based on the law, not IRS guidance.
Fidelity’s interpretation of the law has no bearing on what is legal or not, nor how the IRS enforces the law.
The wealthy sure can do it anyway, but that doesn’t change the fact that they are supposed to pay the gift tax when they do this. If we’re going to continue this thread, then it’s going to end very quickly with the fact that most of US tax collection is based on the honor system. Plenty of people don’t report all of their income,
What I’m taking issue with here is that your central point (correct me if I’ve misinterpreted you here) to this entire post is that the 529 is a legal way to pass down wealth between generations tax free, which is completely false.
Fiby,
I agree with everything you say. I would only clarify, 529 plans are a legal structure to pass down wealth between generations tax free, unlike gold bricks in the basement on one extreme and a checking account on the other extreme. They have features and, as we’ve established, conflicting guidance that makes them more appealing than either.
—Indy
I don’t think we’re in agreement at all. I think it’s pretty clear from not only the IRS bulletin I cited, but more importantly, from the section of the US law I cited in my first comment, that the 529 is NOT a legal structure to pass down wealth to lower generations (ie children) tax free.
The IRS FAQ is irrelevant if anybody is ever challenged by the IRS, because again, the taxpayer is held to what the US law says, not what IRS guidance says.
Fiby,
By “legal structure” I mean a device, a tool, a structure recognized by the law (in the way that a basement full of South African Krugerrands isn’t).
—Indy
I do not and have never I disagreed with you that a 529 is a legal structure. Of course it is. It was written into law.
But what you’re saying goes beyond that. When we substitute in your definition, we have the following assertion
“I would only clarify, 529 plans are a device, a tool, a structure recognized by the law , to pass down wealth between generations tax free.”
It is the last two words of that sentence that I disagree with: “Tax free”. Until you can explain to me how the section of US code concerning changing the beneficiary of a 529 to that of a lower generation, even of the same family, as the old beneficiary, is compatible with your assertion such a maneuver is a TAX FREE event, I will continue to disagree with you.
You said in your very first post that you have a tendency to take things literally. What interpretation of the US code can you make that would support your assertion?
Unless I’m missing something, I don’t think the Fidelity link actually supports your interpretation. Here’s a quote from that link:
If the new beneficiary is a member of a younger generation
relative to the original beneficiary, the transfer may be subject to federal gift and generation-skipping transfer taxes.
Later on in the documents it does say “Member of Family Eligible for a Federal Income Tax-Free Transfer:” I think it’s implied that gift tax might still apply based on the earlier quote.
The tax code helps the poor and working class only when tax credits can be included as part of their refunds—which the mortgage-interest and 529 deductions are not.
Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family.
One key difference between this and a Roth is that withdrawals are prorated equally between contributions and earnings, based on the proportions in the account, unlike a Roth where contributions come first and then earnings.