Qualified state tuition programs--sec. 529 plans.

• Jurisdiction: United States
• Date: 01 October 2000
• Author: Moore, Philip E.

Under Sec. 529(b)(1)(A)(ii), a taxpayer "may make contributions to an account which is established for the purpose of meeting the qualified higher education expenses of the designated beneficiary of the account." This plan is commonly referred to as a Sec. 529 plan. The provisions of this section contain a host of benefits beyond a typical investment vehicle (such as a Uniform Gift to Minors Act (UGMA) account). In an UGMA account, all income and capital gains derived from the invested assets are taxed currently, with the entire amount transferred to the beneficial minor at the age of majority to spend as he pleases. A Sec. 529 plan allows all assets to grow tax deferred until distributed to the beneficiary to pay for qualified higher education expenses (QHEEs); the distribution of earnings is then taxed at the beneficiary's (typically more favorable) tax rate. These funds should not be used to pay income taxes that would be due on the distributions; this would trigger a penalty (usually 10%), which is assessed on any amounts not used for QHEEs.

As of June 26...