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529 plan
A 529 plan, also called a Qualified Tuition Program, is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. In 2017, K–12 public, private, and religious school tuition were included as qualified expenses for 529 plans along with post-secondary education costs after passage of the Tax Cuts and Jobs Act.
529 plans are named after section 529 of the Internal Revenue Code—26 U.S.C. § 529. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors and exemption from state financial aid calculations for investors who invest in 529 plans in their state of residence. Contributions to 529 college savings plans are made with after-tax dollars. Once money is invested in the account, it grows tax-free, and withdrawals from the plans are not taxed when the money is used for qualified educational expenses. Only 2.5 percent of all families had 529 college savings accounts in 2013. As of August 2020, more than $360 billion was invested in 529 college savings plans.
There are two types of 529 plans: prepaid plans and savings plans.
With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages.[citation needed] Qualified distributions from 529 plans for qualified higher education expenses or tuition for elementary or secondary schools are exempt from federal income tax.
529 college savings plans originated from states rather than the federal government. With tuition cost increasing year by year, the state-run prepaid tuition program of Michigan addressed the increasing anxiety on the part of many thousands of Michigan households with the Michigan Education Trust (MET) proposition. This created a fund to which the state's residents could pay a fixed amount in exchange for tuition increases. The initiative sparked interest in other states, which launched their first prepaid tuition program.[citation needed]
Michigan delayed its own launch so that a ruling could be requested from the Internal Revenue Service (IRS) regarding the tax aspect of arrangement. The IRS allowed purchasers of the "prepaid tuition contract" to not be taxed on the accruing value of the contract until the year in which funds were distributed or refunded. Additionally, the trust fund established by the state of Michigan was required to receive prepayments and be subject to income tax on earnings from the invested funds.[citation needed]
The Michigan Education Trust (MET) entered into prepaid tuition contracts with Michigan's residents. An estimated 55,000 individuals signed up for the program. MET paid federal income tax on its investment earnings, and in 1990 filed suit for refund from the IRS. The case was first decided in favor of the IRS, but on appeal in 1994 the Sixth Circuit Court of Appeals reversed the district court judge's decision and found in Michigan's favor.[citation needed]
At one point MET sold prepaid tuition contracts that were below market value, and the program had to be adjusted with appropriate pricing. Today it remains as one of the largest and most successful pre-paid programs.[citation needed]
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529 plan
A 529 plan, also called a Qualified Tuition Program, is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. In 2017, K–12 public, private, and religious school tuition were included as qualified expenses for 529 plans along with post-secondary education costs after passage of the Tax Cuts and Jobs Act.
529 plans are named after section 529 of the Internal Revenue Code—26 U.S.C. § 529. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors and exemption from state financial aid calculations for investors who invest in 529 plans in their state of residence. Contributions to 529 college savings plans are made with after-tax dollars. Once money is invested in the account, it grows tax-free, and withdrawals from the plans are not taxed when the money is used for qualified educational expenses. Only 2.5 percent of all families had 529 college savings accounts in 2013. As of August 2020, more than $360 billion was invested in 529 college savings plans.
There are two types of 529 plans: prepaid plans and savings plans.
With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages.[citation needed] Qualified distributions from 529 plans for qualified higher education expenses or tuition for elementary or secondary schools are exempt from federal income tax.
529 college savings plans originated from states rather than the federal government. With tuition cost increasing year by year, the state-run prepaid tuition program of Michigan addressed the increasing anxiety on the part of many thousands of Michigan households with the Michigan Education Trust (MET) proposition. This created a fund to which the state's residents could pay a fixed amount in exchange for tuition increases. The initiative sparked interest in other states, which launched their first prepaid tuition program.[citation needed]
Michigan delayed its own launch so that a ruling could be requested from the Internal Revenue Service (IRS) regarding the tax aspect of arrangement. The IRS allowed purchasers of the "prepaid tuition contract" to not be taxed on the accruing value of the contract until the year in which funds were distributed or refunded. Additionally, the trust fund established by the state of Michigan was required to receive prepayments and be subject to income tax on earnings from the invested funds.[citation needed]
The Michigan Education Trust (MET) entered into prepaid tuition contracts with Michigan's residents. An estimated 55,000 individuals signed up for the program. MET paid federal income tax on its investment earnings, and in 1990 filed suit for refund from the IRS. The case was first decided in favor of the IRS, but on appeal in 1994 the Sixth Circuit Court of Appeals reversed the district court judge's decision and found in Michigan's favor.[citation needed]
At one point MET sold prepaid tuition contracts that were below market value, and the program had to be adjusted with appropriate pricing. Today it remains as one of the largest and most successful pre-paid programs.[citation needed]