Section 529 college
savings plans
Under the new tax law, withdrawals from a Sect. 529 plan that are made
after Jan.1, 2002, are not tax deferred. They are federal TAX FREE, so long as the
proceeds are used for college expenses (room, board, tuition, books and
supplies). And they can be used at any accredited institution of higher
learning in the U.S., as well as at many foreign institutions. Suppose one
child or grandchild doesn't go to college while another does? Simple.
Beneficiaries are freely interchangeable. Yet you, the donor to the
account, fully control the funds, even after the beneficiary reaches age
18 (unlike an UGMA account, where an "adult" child is free to spend all
the funds on any whim).
And the amounts that a donor can deposit are substantial.
If all this wasn't enough to make Sect. 529 plans one of the greatest
college savings programs in memory, there are amazing estate and gift tax
benefits as well.
Special Gift and Estate Tax Treatment:
Sect. 529 plans get a special gift tax exclusion. In general, under
this rule, you can contribute up to $50,000 for each beneficiary in a
single year ($100,000 for married couples, subject to a maximum
contribution limit of about $246,000) without federal gift tax
consequences, provided you do not make any additional gifts to that
beneficiary over a five-year period). Also, the contributions you make to
these plans are excluded from your taxable estate for federal estate tax
purposes. Of course, account owners are advised to consult their tax
advisor or accountant to determine how their individual tax situation will
be affected.
Caveat: Earnings not ultimately used for higher education purposes
are subject to a 10% penalty when withdrawn and/or contingent deferred
sales charges.
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