What are 529 Plans?
Legally known as a “Qualified Tuition Plan” or “QTP”, a 529 Plan derives its name from Section 529 of the Internal Revenue Code. A 529 Plan is a tax-advantaged savings plan for future college or education costs.
The benefits of establishing a QTP are:
- Earnings accumulate tax-free while in the account.
- The beneficiary doesn’t generally have to include the earnings from a QTP as income.
- Distributions aren’t taxable when used to pay qualified higher education expenses. However, if the amount of a distribution is greater than the beneficiary’s qualified higher education expenses, a portion of the earnings is taxable.
Under the preexisting tax laws, amounts contributed to a 529 Plan were still taxed for federal income tax purposes, but the gains when the funds are withdrawn are not subject to income tax. Although the contributions to a 529 Plan are not exempt from federal income taxation, sums contributed to an Idaho 529 are deductible on Idaho state taxes up to $12,000 if married and filing a joint tax return. Under prior law, the funds distributed from a 529 Plan were also limited to being used for qualifying college education expenses.
Qualifying For Educational Expenses Starting with Kindergarten
Under the TCJA, funds from a 529 account can now be used for qualifying education expenses beginning with kindergarten. Withdrawals from a 529 account for qualifying education expenses are capped at $10,000 each year, per child. Account owners can also roll over 529 Plans to ABLE Plans, up the ABLE contribution annual limit.
In terms of preparing to meet rising tuition costs, a 529 Plan can be an effective tool and may permit the owner of a 529 Plan to finance private school and/or college with tax-advantaged money.