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Saving for College Through Qualified Tuition (Section 529) Programs (Paperback)
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Saving for College Through Qualified Tuition (Section 529) Programs (Paperback)
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Congress has tried to make higher education more affordable by
providing favourable tax treatment to savings accumulated in
qualified tuition programs (QTPs), also called Section 529 programs
after their citation in the Internal Revenue Code. QTPs initially
allowed individuals to save for qualified higher education
expenses(QHEEs) on a tax-deferred basis. The Pension Protection Act
of 2006 (PPA) made permanent the temporary enhancements to QTPs
contained in the Economic Growth and Tax Relief Reconciliation Act
of 2001. The enhancements include making qualified withdrawals from
QTPs tax-free. One type of QTP, prepaid tuition plans, enables
account owners to make payments on behalf of student beneficiaries
for a specified number of academic periods/course units at current
prices thereby providing a hedge against tuition inflation. States
were the only sponsors of prepaid plans until Congress extended
sponsorship to eligible higher education (private) institutions
effective in 2002. States remain the sole sponsor of the more
popular type of Section 529 program, college savings plans, which
account for most of the $105.7 billion in QTP assets as of December
31, 2006. College savings plans can be used toward a variety of
QHEEs at any eligible institution regardless of which state
sponsors the plan or where the beneficiary attends school. In
contrast, if beneficiaries of state-sponsored prepaid plans attend
out-of-state or private schools, the programs typically pay the
same tuition that would have been paid to an eligible in-state
public school. Also unlike prepaid plans, in which the state plan
invests the pooled contributions with the intent of at least
matching tuition inflation, college savings account owners can
select from a range of investment portfolios. College savings plans
thus offer the chance of greater returns than prepaid plans, but
they also could prove more risky. Additionally, college savings
plans charge fees (e.g., enrolment fees and underlying mutual fund
fees) that lower returns -- more so for accounts opened through
investment advisors (e.g., sales charges). The level of these fees
vis-a-vis the tax savings, the extent and manner of fee disclosure
across plans, and the role of federal regulators in this area was
the subject of oversight during the 108th Congress. (More recently,
the 109th Congress included in the PPA enactment of Section 529(f).
It charges the Secretary of the Treasury with developing
regulations to prevent abuse of Section 529 and to carry out its
purposes in general. The Internal Revenue Service currently is
developing a notice of proposed rule making, which will include
portions of the 1998 proposed regulation and anti-abuse rules.)
Both types of Section 529 programs have several features in common
beyond qualified withdrawals being tax-free. Earnings not applied
toward QHEEs (eg: the beneficiary forgoes college) generally are
taxable and subject to a penalty. The tax and penalty can be
avoided if account owners designate a new beneficiary who is an
eligible relative of the original beneficiary. Account owners,
rather than beneficiaries, maintain control over the funds.
Contributions are not deductible on federal tax returns.
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