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Section 529 College Saving Programs
Saving for college has always been a challenge for families. The introduction of state-sponsored college savings plans has created a new type of investment vehicle to help families address this growing need. In 1997, federal tax legislation created Section 529 of the Internal Revenue Code. State college savings programs created under this code, commonly called ˇ§529 Plans,ˇ¨ offer unique features and benefits which can make them an attractive investment for families.
Over 40 states now offer 529 Plans and each one is different. Most programs are open to residents of any state. A family should review the unique features of their state program when comparing it to others.
There are several features which all the state 529 Plans have in common:
529 Plans provide tax-free earnings from the time invested until the money is used to pay for college. This is a change from the tax-deferred status the plans originally had. The Federal Income Tax Cut of 2001 upgraded the 529s to full tax-free status if used to pay college expenses, potentially saving tuition-paying families thousands of dollars.
If the money saved is not used for college costs, the earnings will be subject to a 10% penalty in addition to state and federal taxation. If the student receives a scholarship, an amount equal to the scholarship is not subject to this penalty.
The funds are owned and controlled by the account contributor and not the child beneficiary. It is the contributor who owns the account and decides how the funds are to be used and there are no income limits on eligibility to contribute to 529 Plans.
The maximum amount which can be contributed varies by state with most limits ranging from $100,000 to $268,000. Since the plans allow the changing of beneficiaries, the account can be used for more than one child.
The investment vehicle is almost always some combination of mutual funds. There are usually different investment options for participants to choose among. By law, once made, that choice cannot be changed; a new account must be opened. Age-based asset allocation strategies are most often offered.
The funds can cover the higher education costsˇXboth graduate and undergraduateˇXof any accredited college in the U.S. The funds can be used for qualified education expenses including tuition, books, supplies and equipment, and room and board for campus housing (off-campus housing rates are different).
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