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How 529 Plans Help Families Save for College; How the American
Recovery and Reinvestment Act of 2009 Expanded 529 Plan Features
FS-2009-12, September 2009
Video: English | Spanish | ASL Podcast: English
What is a 529 plan?
It is an investment vehicle designed to help families pay for future expenses associated
with college or other qualified post-secondary training. Though contributions to a 529
plan are not deductible, these plans offer other tax advantages and are named after
Section 529 of the Internal Revenue Code. All 50 states and the District of Columbia
sponsor at least one type of 529 plan.
What’s new?
The American Recovery and Reinvestment Act of 2009 (ARRA) added computer
technology to the list of college expenses (tuition, books, etc.) that can be paid for by a
529 plan. For 2009 and 2010, the law expands the definition of qualified higher
education expenses to include expenses for computer technology and equipment or
Internet access and related services to be used by the designated beneficiary of the 529
plan while enrolled at an eligible educational institution. Software designed for sports,
games or hobbies does not qualify, unless it is predominantly educational in nature.
What “computer technology or equipment” refers to.
This means any computer and related peripheral equipment. Related peripheral
equipment is defined as any auxiliary machine (whether on-line or off-line) which is
designed to be placed under the control of the central processing unit of a computer,
such as a printer. This does not include equipment of a kind used primarily for
amusement or entertainment. “Computer technology” also includes computer software
used for educational purposes.
Origins.
Congress created them in 1996 and they are named after section 529 of the Internal
Revenue code. The legal name for 529 plans is “qualified tuition programs” in the tax
code.
Why use a 529 plan?
There are advantages of 529 plans and one may be suitable for your family’s needs.
Earnings are not subject to federal tax when used for eligible college expenses.
Earnings are often not subject to state tax. States may offer other incentives to in-state
participants. There are no income restrictions on individual contributors. Contributions
are only limited by the qualified education expenses of the beneficiary. You can change
the beneficiary of a plan if the new beneficiary is in the same family. You can open a
plan benefiting anyone: a relative, a friend, or even yourself. The plan owner or
custodian controls the funds until withdrawal, not the beneficiary.
How 529 plans are structured.
There are two basic types of 529 plans -- prepaid tuition plans and savings plans. A
prepaid tuition plan enables a family to pay for future tuition now in current dollars and
prices. A savings plan enables a family to accumulate funds in a tax-advantaged way
for future tuition costs. A 529 plan can be established and maintained by a state, state
agency, or an eligible educational institution. Each 529 plan is somewhat unique. Some
state-sponsored plans offer incentives to in-state participants, such as state income-tax
deductions or credits. Each 529 plan has one custodian and one beneficiary. A student
or future student can be the beneficiary of more than one 529 plan.
Contribution limitations.
Contributions can not exceed the amount necessary to provide for the qualified
education expenses of the beneficiary. Contributors should be aware of potential gift tax
issues if the amount contributed by any one contributor during a year to a given
beneficiary, together with other gifts to that beneficiary, is greater than $13,000. For a
general discussion of gift tax rules, see IRS Publication 950, Introduction to Estate and
Gift Taxes. For information on a special rule that applies to contributions to 529 plans,
see the instructions for Form 709, United States Gift (and Generation-Skipping
Transfer) Tax Return.
Use with other aid.
A family using a 529 plan to pay for some of a child’s college expenses may still be
eligible to claim either the American opportunity credit or the lifetime learning credit.
Check IRS Publication 970, Tax Benefits for Education.
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