Question re Multiple 529 Accounts

[brooklynguy]

Background (this info is not strictly necessary-to-know in order to answer my question below, but it may be of interest to others in the same boat):

I have accumulated a substantial amount of Visa gift cards through my travel hacking and manufactured spending activity.  One of the methods I use for cashing out these gift cards is using a service called Evolve Money to pay certain bills that could not otherwise be paid via credit card, including contributions to the two 529 accounts I set up for my two kids.

Because Evolve Money only allows you to make one payment per account per month, the maximum number of gift cards that I have been able to cash out into my 529 plan is two (one for each kid's account).

Evolve Money announced yesterday that they will start charging fees to use their service to cash out gift cards in this manner, starting next week.  So, starting next week, this will no longer be an attractive option to cash out gift cards.

My proposed potential solution to cash out as many gift cards into my 529 plan as possible is to open additional 529 accounts naming every available "member of the family" (as defined in the relevant IRS rules -- see IRS Publication 970, page 61) of my kids (including myself, my wife, our respective parents, etc.).  I can then fund each of these accounts with a separate gift card this week using Evolve Money, and as soon as possible thereafter I will transfer the funds from all of those accounts into my kids' accounts.

Question:

Are there any negative consequences or reasons why it would not be a good idea to establish multiple separate 529 accounts for the sole purpose of funding each of them with the intention of transferring the funds to the existing accounts of the true intended beneficiaries (i.e., my two kids)?

My understanding is that as long as the beneficiaries of all of the accounts are "members of the family," there would be no tax consequences to moving funds around among them.

The fact that I would be frontloading all of the funds (possibly at the time of a market peak) does not bother me -- that's what I would have done anyway at the beginning of the year if it were not for the fact that I am using gift cards and Evolve Money to fund my contributions.

Thanks in advance for any insights.

[seattlecyclone]

I don't think there would be any tax consequences to doing this, provided the amounts aren't big enough to run into issues with the gift tax. You could probably even open up multiple accounts in the same kid's name if you felt like it. The only thing I can think to be concerned about would be whether your 529 administrator would charge any fees to close, rename, or consolidate accounts.

[brooklynguy]

Thanks.  As far as I can tell, NY's 529 plan charges no fees for any of these types of account changes.  The total amount involved would be well under the gift tax exclusion.  I wish I would have thought of doing this earlier in the year (before the market run-up), but I wasn't facing the change in Evolve Money's policy at the time and necessity is the mother of invention.  I do still feel a bit uncomfortable about establishing multiple 529 accounts for the sole purpose of unloading gift cards, but unless anyone chimes in with a valid reason not to do so, I will go ahead with it.

[brooklynguy]

Cathy, you may not be a lawyer, but it's always fun to watch you play one on these forums :-)

The statutory provisions you quoted are relevant for determining whether a program qualifies as a 529 plan, which you seem to acknowledge in your post.  I can assure you that New York's 529 plan indeed qualifies as a 529 plan, and will continue to qualify as a 529 plan regardless of my account opening and closing activity.  (Wouldn't it strike you as absurd if I had the power to cause the State of New York's 529 plan to cease to qualify as such?!)

Given that the 529 plan is indeed a 529 plan, it most certainly does (as you correctly suspected!) fulfill the federal requirement to maintain adequate safeguards to prevent excessive contributions.  It does this by restricting additional contributions once the total balances across all accounts for the same beneficiary exceed $375k.  Unfortunately, even liquidating all of my gift cards in their entirety would pose no risk of approaching this threshold.

[brooklynguy]

That would indeed be absurd and is not what I suggested. It is entirely possible that a state could be advertising a program as a "529 plan" while the program does not meet the requirements of a 529 plan. I didn't say that was actually the case here, of course.

Yes, that is exactly what you suggested -- what else could you have been trying to suggest when you said that "It could be argued that if you establish the account for the purpose of liquidating gift cards...then the account is in fact not a 529 plan at all"?

Now you say your point was merely that my state's 529 plan may in fact not be a 529 plan because of flaws in its design wholly unrelated to my gift-card-liquidation and account-opening-and-closing activity.  If the State of New York were falsely advertising its "non-529 plan" as a "529 plan," then each of the State and I and everyone else participating in the plan all have a massive problem on our hands, but that's got absolutely nothing to do with the topic at hand.  So your second post in this thread was even more absurd than the first.  When I playfully called you out on the absurdity of the first one, simply admitting that you got in over your head in your attempt to marshal arguments based on the language of the statutory provisions you summoned up from Google would have been a more graceful response than digging yourself deeper into your hole.

I don't mean to belabor the point, but I've noticed that you have a dangerous tendency to hold yourself out as an expert on a staggering array of subjects.  You are clearly a very intelligent person, but you sometimes speak with an air of authority that could lead the uninformed reader to assume that you actually know what the hell you are talking about (even in circumstances when you clearly don't).  Skyrefuge recently mused on the topic of "how we know whose opinions to trust" and how some posts generate their own trust.  I think that post deserves your attention.

[brooklynguy]

If a purported 529 plan provides that you can open an account for the purpose of liquidating gift cards, or for any purpose other than providing for the qualified higher education expenses of the designated beneficiary, then it may not be a 529 plan. Whether you actually open an account for that purpose is irrelevant, but if the plan allows opening accounts for that purpose, then it may not be a 529 plan. The word "can" should have appeared between "if you" and "establish the account". As I also noted in my post, this is a pretty flimsy basis for arguing that the plan is not a 529 plan, but it is not based on any misunderstanding of the statute.

Okay, with that clarification your response makes more sense to me (though I still believe the potential argument you describe is more than flimsy, it is entirely unfounded, for the reasons described below) and I therefore overreacted and I apologize.  It is difficult to communicate tone through internet postings, so I'm sure part of the problem is my own misinterpretation of your tone.  I'm sorry if I was insulting, and I clearly have made an ass of myself by responding to what I thought was a post that made absolutely no sense but I now see was due to my own failure to grasp the point you were trying to convey.

Back to the merits, I don't believe the fact that the plan's design allows for users to liquidate gift cards in the manner I am suggest poses any risk that the plan does not satisfy the federal criteria for a 529 plan.  The ability to liquidate gift cards arises only because a third party payment service exists that accepts gift cards as a form of payment and permits contributions to be made to this particular 529 plan, and has nothing to do with the design of the plan itself.  All 529 plans are designed in a manner that allows users to fund them for purposes other than paying for qualified higher education expenses (since there is nothing that prohibits users from using the proceeds for other purposes), but the tax and penalty incentive structure is designed to discourage other uses.  That tax and penalty structure is also part of the federal statute, so it certainly can't be the case that a state's plan has to go farther to meet that requirement.  But I now appreciate the point you were making, and again apologize for my initial reaction.

[arebelspy]

Wow, mature adults discussing a misunderstanding and apologizing and on the Internet!  I love it.  :)