Ta-Free 529s Could Become Permanent

By Arthur D. Postal

May 18, 2005 at 08:00 PM

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The current tax-free status of withdrawals from college savings plans would be made permanent under bipartisan legislation introduced Tuesday in the House.

Currently, the tax-free status of withdrawals expires in 2010. Under the legislation introduced by Reps. Earl Pomeroy, D-N.D., and Melissa Hart, R-Pa., that status would be made permanent under the Tax Code.

Section 529 of the Tax Code covers prepaid tuition plans and savings plans. "The time to make Section 529 tax-exemption permanent is now," Pomeroy, a former North Dakota insurance commissioner, said. "Families are putting aside savings today and are looking forward 5 or 10 or 15 years to a time when they can use the funds to pay for college. This legislation will assist families in planning long-term savings strategies to help fund their children's education."

According to the two congressmen, more than 7 million children are enrolled in 529 plans, representing more than $67 billion in funds dedicated to their future college costs. The tax-free and administratively simplified provisions were established as part of the tax reduction act of 2001. It was retroactive effective Jan. 1, 2001, and is set to expire Dec. 31, 2010.

Under the bill, distributions from Section 529 accounts will remain tax free if the money is used for a qualified higher education expense after Jan. 1, 2002. It also provides for increased caps for room and board distributions for both on- and off-campus students; and inclusion of the cost of services for students with special needs.

The bill is known as the College 529 InvEST (Investment in Education Savings for Tomorrow) Act.

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