529 Plan Helps Save For College
Two Different 529 Plans
By Scott Reeves
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Section 529 of the Internal Revenue Code created the college savings plan much like Section 401 (k) created the individual retirement account. The 529 Plan comes in two basic types: state-sponsored and independent.
Savings in a state-sponsored 529 Plan can be used at most accredited colleges and universities in the U.S. and many schools abroad. The plan's benefits include tax-deferred growth and federal income tax-free withdrawals when used for "qualified expenses" such as tuition, fees, books, supplies, required equipment, and eligible room and board.
The Pension Protection Act of 2006 makes permanent investors' ability to withdrawn earnings from 529 plans free of federal taxes for qualified federal expenses. Without the law, federal tax breaks would have expired at the end of 2010.
The Independent 529 Plan is the first-prepaid plan sponsored by private, or independent, colleges in the United States. Participants can prepay all or part of future tuition at a private college at less than current prices and receive the tax advantages of a 529 Plan. About 250 private colleges and universities participate in the program.
The account owner maintains control over all funds in the 529 Savings Account. Plans also offer gift and estate tax planning benefits, one of the major benefits of the savings account.
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