Advanced Underwriting Consultants

Question of the Day – March 25

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client has a Section 529 college savings plan, and is unhappy with the performance of the fund.  He is interested in transferring the money from the plan into a new equity indexed universal life (EIUL) contract, as he believes that the combination of conservative growth and death benefit are better fits for his needs.  What are the tax consequences of making the transfer?

Answer: Moving money from a 529 plan to EIUL will be considered to be a nonqualified taxable distribution from the 529 plan.  Amounts received in excess of contributions will be taxable and subject to a 10% penalty tax.

A big deposit of money into an IUL plan may make the contract a modified endowment contract (MEC)—which should be avoided if distributions are intended for college.  Distributions from a non-MEC life contract are considered a tax-free return of basis first, and taxable thereafter.  Distributions from a MEC are taxed on a gain-first basis, and the gain portion of distributions are also potentially subject to a 10% penalty tax.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.