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College Savings Plan Now Completely Tax-Free
- September 12th, 2001
An attractive way of getting money out of an estate while helping a grandchild pay for college just got even more appealing. Under the recently enacted tax law, starting in 2002 earnings from so-called 529 accounts will no longer be taxable.
Named for Section 529 of the Internal Revenue Code, 529 accounts enable people to reduce their taxable estate while earmarking funds for the higher education of a grandchild (or any other family member). Persons setting up such a savings account can take the money back later if needed, while retaining control over the account. Funds contributed to the accounts are usually invested in mutual funds to pay for a grandchild''s college tuition, room and board, or other expenses.
Donors can contribute up to $10,000 per year ($20,000 for a couple) to 529 accounts without incurring a gift tax. Or, if they prefer, they can contribute up to $50,000 ($100,000 for a married couple) in the first year of a five-year period, as long as there are no additional gifts to that same beneficiary over the five years.
Until the new tax law was passed, the account funds accumulated tax-free until the beneficiary (the grandchild) withdrew them to pay for college expenses, at which time the earnings were taxed at the beneficiary''s tax rate. Under the new tax law, the earnings from these accounts will be tax-free after withdrawal, beginning in 2002.
Other beneficial changes in 529 accounts include the simplification of the penalty for taking money back. Previously, the penalty was based on the circumstances of the withdrawal and was at least 10 percent of the earnings. The penalty will now always be just 10 percent of the earnings.
For more on 529 accounts, click here.