What is 529 PLAN? What does 529 PLAN mean? 529 PLAN meaning - 529 PLAN definition - 529 PLAN explanation.
Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license.
A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary.
529 plans are named after section 529 of the Internal Revenue Code 26 U.S.C. § 529. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors and exemption from state financial aid calculations for investors who invest in 529 plans in their state of residence.
There are two types of 529 plans, prepaid plans and savings plans.
Prepaid plans allow one to purchase tuition credits at today's rates to be used in the future. Therefore, performance is based upon tuition inflation.
Prepaid plans may be administered by states or higher education institutions.
Currently, 10 states provide a prepaid tuition plan that is accepting new applicants. Those states include Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington.
Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds.
Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college age.
Savings plans may be administered by states only.
Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company.
With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages. Qualified distributions from 529 plans for qualified higher education expenses are exempt from federal income tax.
Legislation introduced in the U.S. House of Representatives in 2011 by Congresswoman Lynn Jenkins, (R-KS) and Congressman Ron Kind, (D-WI) that would include 529 plan contributions in the SAVERs tax credit, make permanent the inclusion of computers as a qualified expense, provide for four annual investment direction changes and provide employers with an incentive to contribute to the 529 plans of their employees.
There are many advantages to the 529 plan:
First, although contributions are not deductible from the donor's federal income tax liability, many states provide state income tax deductions for all or part of the contributions of the donor. Beyond the potential state income tax deduction possibilities, a prime benefit of the 529 plan is that the principal grows tax-deferred and distributions for the beneficiary's college costs are exempt from tax.
Many states give the account owner a full or partial state income tax deduction for their contributions to the state's section 529 plans. So far a total of 34 states and the District of Columbia offer such a deduction. California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey and Tennessee currently have state income taxes but do not offer a state income tax deduction or tax credit for contributions to the state's 529 college savings plan. Alaska, Florida, Nevada, South Dakota, Texas, New Hampshire, Washington and Wyoming do not have state income taxes. Contributions to other states' section 529 plans are generally not deductible in your home state. Only Pennsylvania, Arizona, Maine, Missouri and Kansas provide for state tax parity, where contributions to any state plan are eligible for the state's income tax deduction.
Second, the donor maintains control of the account. With few exceptions, the named beneficiary has no rights to the funds. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked....