What could the Pension Protection Act of 2006 possibly have to do with saving for college?
The new pension legislation, which was signed into law in August 2006, made tax–free withdrawals from a 529 college savings plan permanent. Without this legislation, tax–free withdrawals would have expired after 2010. This may have removed a potential source of uncertainty for families who are using 529 plans to help send their students to college.
High Marks for Tax–Free Withdrawals
Section 529 savings plans are state–sponsored plans that allow families to save for future higher education costs. Contributions are made with after–tax dollars, which the plan sponsor invests in pursuit of potential returns that accumulate on a tax–deferred basis. Withdrawals used for qualified higher education expenses (tuition, fees, room and board, and supplies) are tax–free.
Family members who want to contribute to a 529 plan can contribute up to $12,000 (or $24,000 for a married couple) to a student each year without incurring gift taxes. It’s also possible to contribute up to $60,000 (or $120,000 for a married couple) to a student in a single year as long as no other contributions are made for five years.
As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments.
The tax implications of a 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
Before investing in a 529 savings plan, please consider the investment expenses, risks, and charges carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. This material should be read carefully before investing.
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