Basics of Section 529 Plans: Figuring Out the Qualifying Criteria
Section 529 plans seem to be wrapped in qualification after qualification, but don't allow these endless lists of criteria discourage you from using 529 plans. Instead, check out how I break down those lists of qualifications so that you can easily identify whether your plan, your student, and your student's expenses meet the myriad criteria associated with 529 plans.
When you make a contribution to a Section 529 plan, you're not allowed any federal income tax deduction for the amount of your contribution (unlike many sorts of retirement plans, which defer income tax not only on the accrued earnings in the account but also on your contributions). Depending on what state you live in (and if you use its plan), you may get a current state income tax deduction for part or all of your contribution each year.
After your money is safely tied up in a Section 529 plan, interest that you earn on it isn't taxed until distributions (amounts of money you take out of the plan to pay your student's expenses) are made to your designated beneficiary. And, if you use distributions from these plans to pay the qualified education expenses of a student at an eligible educational institution (these are the IRS's words, not mine), accrued earnings generally aren't taxed at all.
In other words, a Section 529 plan allows you to save for college, and it exempts or defers income tax on the accrued earnings until the designated beneficiary begins taking distributions from the plan.
At this point, you may be thinking that the only educational institutions that these plans are qualified to pay for are colleges and universities. Not true. Qualified institutions include all postsecondary schools that are eligible to participate in U.S. Department of Education financial aid programs, including many vocational and technical schools, community colleges, and even some apprenticeship programs. Eligible institutions don't need to be located in the United States; many foreign colleges and universities qualify. The standard here is that the schools must be eligible; they don't actually have to participate in these financial aid programs. Check with the institutions you or your student are interested in to be sure that they qualify.
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