![]() ![]() This is now part of the Small Business Job Protection Act of 1996. Subsequently, Congress has passed new legislation authorizing qualified state tuition programs. Today it remains as one of the largest and most successful pre-paid programs. Īt one point MET sold prepaid tuition contracts that were below market value, and the program had to be adjusted with appropriate pricing. 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. MET paid federal income tax on its investment earnings, and in 1990 filed suit for refund from the IRS. An estimated 55,000 individuals signed up for the program. The Michigan Education Trust (MET) entered into prepaid tuition contracts with Michigan's residents. 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. 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. 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 initiative sparked interest in other states, which launched their first prepaid tuition program. This created a fund to which the state's residents could pay a fixed amount in exchange for tuition increases. 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. History ĥ29 college savings plan originated from states rather than the federal government. Qualified distributions from 529 plans for qualified higher education expenses or tuition for elementary or secondary schools are exempt from federal income tax. With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages. Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company.Savings plans may be administered by states only.Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college age.Investors can select stocks and bonds via preset investment menus. Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds and exchange-traded funds (ETF).Those states include Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington. Currently, 10 states provide a prepaid tuition plan that is accepting new applicants.Prepaid plans may be administered by states or higher education institutions.Therefore, performance is based upon tuition inflation. Prepaid plans allow one to purchase tuition credits at today's rates to be used in the future.There are two types of 529 plans: prepaid plans and savings plans. As of August 2020, more than $360 billion was invested in 529 college savings plans. ![]() Only 2.5 percent of all families had 529 college savings accounts in 2013. 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. Contributions to 529 college savings plans are made with after-tax dollars. 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. Overview This article is part of a series onĥ29 plans are named after section 529 of the Internal Revenue Code- 26 U.S.C. 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. JSTOR ( January 2015) ( Learn how and when to remove this template message)Ī 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.Unsourced material may be challenged and removed. Please help improve this article by adding citations to reliable sources. This article needs additional citations for verification. ![]()
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