Consumer Issues

Essay by PaperNerd ContributorUniversity, Master's September 2001

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Mirroring the renewed emphasis in our society on the importance of educating our children, the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act) contains a slew of tax-driven education initiatives. In previous articles, we have reviewed the changes made to the Code's Education IRA provisions (see 2001 Tax Act Modifications to the Education IRA Provisions). Subsequently, we looked at the revised rules for deducting student loan interest (see Liberalized Rules for College Loan Interest Deduction under the 2001 Tax Act) as well as the new deduction for college expenditures (see New Above-the-line Deduction for College Expenses under the 2001 Tax Act).

Now, we'll turn our focus to qualified state tuition programs, also known as Section 529 plans. (The official title of these programs changes to "qualified tuition programs" beginning in 2002, so this is the term we'll use to refer to these programs throughout the remainder of this article.)

This article looks at the basic characteristics of these programs, while a companion PPCnet article looks at the tax aspects of these programs (see Federal Taxation of Qualified Tuition Program Contributions and Distributions).

The Act made several favorable changes to qualified tuition programs (QTPs). These changes include: authorizing tax-free distributions when used for qualified education expenses, allowing same-beneficiary rollovers from one state plan to another, adding first cousin to the list of "family members" eligible for beneficiary changes, extending the tax benefits to prepaid tuition plans established by educational institutions, and modifying the required 10% penalty on nonqualified payouts so it is payable to the IRS rather than the state.

Also, as already noted, the Act changed the title of these plans to "qualified tuition programs" since they now encompass both state and nonstate programs. All of these changes are effective beginning in 2002.

Introduction to Qualified Tuition...