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Old 10-06-2011, 03:36 PM
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"Rolling Over" or Converting a 529 Plan into a whole life insurance policy

I work at a college planning company and many families that we service have 529 plans and state prepaid college funds.
1. Can a 529 plan be "rolled over" or converted into a whole life insurance policy (I'm specifically thinking of using a Covenant II Infinite Banking Concept[IBC] policy from Mutual Trust Life[MTL] )?
2. What are the tax liabilities of liquidating a 529 Plan for the purpose of putting the money into a whole life insurance policy?
3. Is there a 10% penalty for the lumpsum withdrawal?
4. Are the 529 funds taxed at the time of withdrawl?



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Old 10-06-2011, 10:34 PM
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“1. Can a 529 plan be "rolled over" or converted into a whole life insurance policy (I'm specifically thinking of using a Covenant II Infinite Banking Concept[IBC] policy from Mutual Trust Life[MTL] )?”--->I guess you need to contact your 529 administrator. The process for moving funds from a 529 plan to an whole life insurance policy involves liquidating the 529 plan. You can't do a tax-free rollover of the money into an insurance policy/ tax-advantaged retirement account or etc.Funds cannot be directly rolled into the policy without paying taxes. The significance of moving money from your 529 plan to life insurance policy is that the transfer is not a normal transfer or rollover.There are people using Permanent life insurance as an alternative funding vehicle; there are several reasons. For example, life insurance is a self-completing plan. Assume that dad is the breadwinner in the family. If he dies when a child is young without fully funding a 529 plan, there will be a significant shortfall when the child goes to college. But if dad owns life insurance, it would pay an income tax-free death benefit to the beneficiary (presumably the surviving spouse) who can use that money for the child's college education. Another reason is trhat cash value in a life policy will not only grow tax-deferred, but can be removed tax-free within limits for college expenses, through policy loans.
“2. What are the tax liabilities of liquidating a 529 Plan for the purpose of putting the money into a whole life insurance policy? “---->Any amount distributed from 529 plan,a qualified tuition program, is not taxable if it is rolled over to another 529 plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. section 529 qualified tuition plans are funded with after-tax contributions, at least on the federal level. Some states do offer a tax break on contributions made to 529 plans, or income exemptions on qualified withdrawals (at least on the state-sponsored plans in that state). You can close the account, but you'll owe income taxes on the investment earnings and possibly a 10 percent penalty tax. Since you contributed after-tax dollars, you've already paid federal income taxes on the contributions.
“3. Is there a 10% penalty for the lumpsum withdrawal? “---> Correct;
“4. Are the 529 funds taxed at the time of withdrawl?”---->Correct. As said above, you need to pay 10% penalty on accumulated earnings if the account has. Please contact your 529 administrator for more information.



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