New Federal Tax-Free Treatment of 529 College Savings Plans –
Plus Other Great Changes
The new tax cut brings incredible changes to the world of college saving, including increased child credit and the repealing of the estate tax; but perhaps the biggest impact is on 529 College Savings Plans. The new legislation also incorporates changes to the Education IRA and adds a deduction for qualified higher education expenses. Following is a summary of college savings related changes:
529 College Savings Plans
Tax-free withdrawals. Starting in 2002, all qualified withdrawals from 529 Plans will be Federal income tax-free. This new tax-free status can help maximize a family's ability to meet the rising cost of college. In addition, this change may have a positive effect on a student's eligibility for financial aid since qualified withdrawals will no longer be considered income to the student.
Adjustment of limitation for room and board increases the amount that can be used for qualified room and board expenses. New limitations are directly tied to the room and board costs for housing owned or operated by the eligible educational institution.
Member of family to include first cousin. Expands list of family members to include first cousin of the original beneficiary. Allows grandparents to change beneficiaries among grandchildren.
Coordination with Education IRAs allows contributions to Education IRAs and 529 Plans for the same beneficiary in the same year. No more excise tax on combined contributions.
Rollover between 529 Plans permits participants to transfer assets from one 529 Plan to another without changing the beneficiary once every twelve months. Allows for greater portability of college savings assets and increased flexibility to select among program providers.
Education IRAs
Increased annual limits to $2000. Starting in 2002, families can contribute four-times the previous annual cap of $500. This will allow greater total savings in Education IRAs.
Use for grades K through 12. Expands approved use of Education IRA assets to elementary and secondary school costs, as well as to cover computer technology and internet access while beneficiary is in school. The modified AGI phase-out on Education IRAs for married couples increases to $190,000.
Other changes. Starting in 2002, contributions will be allowable not only from individuals but also from corporations, tax-exempt organizations and other entities. Contributions counted toward any tax year will be permissible until April 15 of the following year, rather than being cut off on December 31.
Deductions for college expenses
Adjusted Gross Income deductions for qualified higher education expenses. Families can take a tax deduction for qualified higher education expenses. Deductions are based on AGI and will be phased in as follows:
Year AGI (single/married) Amount
This deduction cannot be claimed in the same year as a HOPE or Lifetime Learning credit for the same student.
As with this entire tax bill, it's important to note that the provisions of the tax bill all expire at the end of 2010 and will need to be extended by Congress to continue past that date.
The new Federal tax-free status of the 529 Plans may be difficult to beat. Add tax-free to the fact that there are no income restrictions and that the assets can be used at accredited colleges and universities across the country – and you have a great vehicle to save for college.
Learn more about Fidelity managed 529 Plans.

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