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529 Plans Just Keep Getting Better:
Federal income tax-free treatment of qualified withdrawals is now permanent

The law governing the Federal income tax treatment of qualified withdrawals from Section 529 plans has changed – for the better! The Pension Protection Act of 2006 makes permanent the federal income tax exclusion for qualified withdrawals from section 529 plans. The Act also preserves the income tax exclusion at the state level in those states that follow the federal tax treatment of 529 plans.

In addition to the tax exclusion, several other 529 benefits are now permanent. These include: allowing same-beneficiary rollovers, eliminating the mandated state-imposed penalties on non-qualified distributions, including private-college prepaid tuition plans under 529 (i.e. Independent 529 Plan), and including first cousins as eligible members of the family for purposes of rollover and change of beneficiary rules. It's all good news.

A bit of history

You may recall that the tax bill of 2001 known as EGTRRA made qualified distributions from 529 plans exempt from income tax, broadened the definition of "family members" to whom a 529 beneficiary might be changed, and granted permission to colleges, or a consortium of colleges, to sponsor 529 plans. It was the legislation that led to the launch of the Independent 529 Plan.

However, EGTRRA contained language that said that all of the tax measures in the bill would “sunset” or expire, in January 2011. Tuition Plan Consortium, TIAA-CREF, and 529 savings plan sponsors from around the country have been urging Congress to remove this sunset clause and make the 529 plan provisions of EGTRRA permanent.

This summer, Congress took action. With broad bi-partisan support, 529 “permanency” was included in an omnibus pension bill. On August 17, the President signed the “Pension Protection Act of 2006” into law. The 529 provisions included in EGTRRA in 2001 are now permanent.

Our perspective

Tuition Plan Consortium, the not-for-profit organization that sponsors Independent 529 Plan – a pre-paid tuition plan designed specifically for use at more than 250 private colleges and universities nationwide – applauds the inclusion of the provision that makes permanent the favorable federal tax treatment of 529 plans in the Pension Protection Act of 2006.

"This legislation means that American families can count on their qualified withdrawals from 529 plans – both savings plans and prepaid plans – being federal income tax-free,” said Nancy Farmer, President, Independent 529 Plan. “Every step we take that encourages families to save for college is a step in the right direction and we applaud Congress’ leadership on this issue. This legislation makes the value of Independent 529 Plan even greater."