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The Section 529 Plan

A 529 plan is a higher education savings program that provides federal tax-free benefits. The program allows individuals to save for the future education costs for a designated beneficiary. To take advantage of the 529 plan, the beneficiary may live in any state and use the funds to attend school anywhere in the country. For details of Pennsylvania's TAP529 Plan - Click Here.

Contribution Limits
You can contribute to a 529 plan until the total value (contributions and earnings) of all accounts for that beneficiary equals the maximum amount. Once the limit is reached, no additional contributions are permitted. However, the earnings can continue to grow in excess of this limit.

Beginning in 2002, withdrawals taken for qualified higher education are tax free. Account withdrawals not used for qualified higher education are taxed as ordinary income on the earnings at the ordinary income tax rate (if you established the account). There is also a 10% penalty on earnings withdrawn for reasons other than higher education.

Flexibility
If your beneficiary decides not to go to college, you may leave the money in the account for use either by your beneficiary, who may eventually decide to pursue a higher education, or by your beneficiary's child. You may also change the beneficiary to a family member of the original beneficiary.

Gift Tax and Estate Planning Benefits
Contributions to a 529 plan are considered completed gifts for federal gift and estate tax purposes and are excluded from your taxable estate. You can generally contribute up to $50,000 for a beneficiary in a single year ($100,000 for married couples) without federal gift tax consequences, provided you do not make any additional gifts to that beneficiary over a five-year period. This accelerates use of the annual gift tax exclusion for the next four years. As the account owner, you (not your beneficiary) choose how the money is initially invested and withdrawn. Your beneficiary will not have the ability, regardless of age, to make withdrawals from the Section 529 Plan. A portion of this gift may be brought back into your estate if you die within this period.

These laws have changed for 2002. Learn more about the implications of A 529 plan is a higher education savings program that provides federal tax-free benefits. The program allows individuals to save for the future education costs for a designated beneficiary. To take advantage of the 529 plan, the beneficiary may live in any state and use the funds to attend school anywhere in the country.

For details of Pennsylvania's TAP529 Plan - Click Here.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last updated on Wednesday, January 02, 2008 11:22 AM