Congress originally created the Qualified State Tuition Plan, often referred to as the Sec 529 Plan, as a tax-beneficial incentive for parents, grandparents, and others to save money for an individual’s future college tuition and fees. There is no federal tax deduction for making contributions, but taxes on the earnings within a plan are not only tax-deferred while they are held in the account, they are tax-free when withdrawn to pay for qualified education expenses. Thus, the real tax benefit of these plans is the earnings within the plan accumulating tax-deferred and then being tax-free when withdrawn if used for college tuition and related qualified expenses.
Since originating these plans, Congress has continued to modify the purpose of the plans by allowing plan funds to be used for more than just college tuition and fees. Over the years, they have allowed plan funds to be spent on additional expenses, including books, supplies, equipment, reasonable room and board, and computer technology.
A frequently asked question is, “How might I save for a child’s college education?” The answer depends on how much the education is expected to cost and how much time is left until the child heads off to college or university.
The amount of funds that will be required will depend upon whether your child will be attending a local college, attending a local college and then transferring into a university, or going straight to the university. If attending college locally, you generally only need to be concerned about tuition, and the child can live at home, whereas attending a university, unless it is local, will add the cost of housing and food on top of substantially higher university tuition. Another factor is whether the student will leave school after obtaining a bachelor’s degree or will be doing graduate studies for an advanced degree.
Recent tax regulations have acknowledged the fact that computers, peripheral equipment, certain types of nonentertainment software, Internet access and related services are essential for postsecondary education. Thus, when those items are used primarily by a beneficiary of a qualified state tuition (Sec 529) plan, the cost of the items can be reimbursed from the plan’s funds, tax-free.