Tax Benefits of a 529 College Savings Plan


TextbooksHigher education costs are steadily rising and a college savings strategy is becoming a requirement for today's parent. Many people saving money for college have found that the tax savings features of 529 college savings plans — made possible by the Pension Protection Act of 2006 — work to their advantage.


How the law changed

  • The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRRA) created provisions for federal tax-free withdrawals from 529 plans for qualified expenses
  • The provisions were set to expire on December 31, 2010
  • The Pension Protection Act of 2006 made the tax exclusion for qualified 529 withdrawals permanent

What else the Pension Protection Act of 2006 does

  • Preserves the income tax exclusion at the state level in states that follow the federal tax treatment of 529 plans
  • Provides for the creation of prepaid tuition programs
  • Allows rollovers from one 529 account to another every 12 months
  • Allows same-beneficiary rollovers
  • Eliminates the mandated state-imposed penalties on nonqualified distributions
  • Makes first cousins eligible members of the family for purposes of rollover and change of beneficiary rules1

What it means to you

  • No tax on any growth of your 529 plan savings or qualified withdrawals
  • Greater flexibility with your investment choices
  • More options for whose education you can fund with your account
  • No expiration date for the provisions of the Pension Protection Act, so you can always make tax-free withdrawals for qualified expenses

You may also be able to deduct some or all of your 529 plan contributions from your state taxes if you participate in a plan sponsored by your home state. To find out more, try a web search using the name of your state and ‘529’.

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