Section 529 Plans Tax Benefits Made Permanent

Section 529 Plans and the Pension Protection Act of 2006

The biggest benefit of Section 529 plans, the tax-free withdrawals for qualified education expenses, is not going to disappear in 2010 as previously scheduled. Ironically, many parents had no idea that this benefit was in fact scheduled to “sunset.”

Perhaps it’s because many people who sold Section 529 plans knew that mentioning that possibility would hurt sales. Or perhaps it’s that they didn’t know or didn’t seriously believe it could happen.

Thankfully, the Pension Protection Act of 2006 made tax-free qualified withdrawals from Section 529 plans permanent. This legislation counteracts the “sunset” provision for Section 529 plans that was included when they were initially created under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

Non-qualified withdrawals (those not used to pay for college related expenses) will continue to be subject to a Federal and state income tax on the gains, as well as a 10% penalty on any gains.

It still remains to be seen if Congress will attempt to close some of the estate planning loop-holes created along with Section 529 plans.