Senate Passes Bill Extending 529 College Savings Plan Tax Benefit
August 15, 2006

The Senate passed the Pension Protection Act (H.R. 4) last Thursday, which includes a provision eliminating the 2010 "sunset" date on the federal income tax exclusion for qualified distributions from a 529 plan. The Act makes permanent the tax exclusion for qualified withdrawals, which is what we've been asking for since 2001.The Senate's approval clears the bill for the President to sign into law. Prior to passage of this bill, parents saving for college with 529 Plans worried that, after 2010, taxes would be due on the earnings portion of funds even if the monies were used to pay for college expenses.

You may recall that the tax bill of 2001 known as EGTRRA included language that said that all of the tax measures in the bill would revert back to their former state, or "sunset," in January, 2011. This meant that earnings on 529 balances would be taxable upon distribution even when the dollars were to be used for college expenditures. Now the House and Senate have each passed bills that make the tax free distribution permanent.

(Of course, in order to be tax free, the dollars have to be used for qualified education expenses, which includes tuition, fees, books, and equipment necessary for studies. If your child gets a scholarship, you may still draw out that amount but it will be taxable to the child/beneficiary. The 10% penalty in addition to income taxes applies when money is withdraw for expenses other than qualified education expenses.)

The Act will also preserve the tax exclusion at the state level in those states (of which there are many) piggy-backing on the federal tax treatment of 529 plans. North Carolina is one of those states; good news for the bulk of our clients who call this fine state “home”! In addition to the tax exclusion, several other 529 benefits that came about with the 2001 EGTRRA will now be made permanent. These are the rules allowing same-beneficiary rollovers, eliminating the state-imposed penalties on non-qualified distributions, giving 529 status to private-college prepaid tuition plans (i.e. Independent 529 Plan), and including first cousins as eligible members of the family. It's all good news.

Benton Bragg, CFA, CFP
President, Bragg Financial Advisors, Inc.
Registered Principal, Queens Road Securitites, LLC
704-377-0261
www.braggfinancial.com

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.