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| Basics |
| 529 college savings plans are one of the most popular accounts to fund your child’s higher education. In its most basic form, a 529 plan allows you to save money for your child’s higher education since the earnings grow tax-deferred and withdrawals, if used for qualified educational expenses, are federal income tax-free. There are two types of plans: 529 College Savings Plans & 529 Prepaid Tuition Plans. |
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| 529 College Savings Plans |
| Individual states will sponsor a plan and contract a program manager to facilitate the distribution of the account to the public. For example, the State of California uses Fidelity to offer its 529 plan called “ScholarShare.” |
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| 529 Prepaid Tuition Plans |
| 529 Prepaid Tuition Plans allow onwers of the account to "prepay" for future tution rates at today's prices. These programs are overseen by the state and have been dwindling in numbers. |
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| Tax Relief Act of 2001 Changes |
| The plans are named after Section 529 of the IRS tax code and were first introduced in 1986, but they became more widely used after George W. Bush’s Tax Relief Act was enacted in 2001. |
| - Owners were allowed to claim other tax benefits such as the Lifetime Learning Credit and the HOPE Scholarship in the same year as 529 plan withdrawals as long as they weren't claimed for the same expense. |
| - Instead of withdrawals being tax-deferred, they became tax-free. |
| - Owners were allowed to change 529 plan providers and keep the same beneficiary. |
| - First cousins and other relatives became eligible family members if an owner wanted to switch the beneficiary. |
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