When it is time for a beneficiary to attend college, account owners can make withdrawals tax-free for qualified higher education expenses
like tuition, fees, room and board, books, equipment, computers, and internet access.
* Qualified higher education expenses
are defined differently from qualifying expenses for education savings bonds.
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As it stands now, investments in 529 plans grow tax-free and are not taxed when used to pay for qualified higher education expenses
. The earnings portion of nonqualified 529 plan withdrawals are subject to income tax as well as a 10% penalty.
Finally, adjusted qualified higher education expenses
(AQHEE) are available.
Earnings on the amount invested are not subject to tax currently and will not be taxed if distributions from the 529 plan are used to pay the beneficiary's qualified higher education expenses
. If distributions are used for other reasons, they generally will be subject to tax and a 10% penalty.
All or part of the interest on these bonds is exempt from tax if qualified higher education expenses
are paid in the same year the bonds are redeemed.
Although you do not receive any Federal tax deduction for the contributions you make to these plans, the distributions are generally tax free to the extent that you use them to pay for qualified higher education expenses
. For example, assuming you contribute $10,000 to a 529 plan in the year your child is born and this amount accumulates to $30,000 by the time the child is ready to attend college, this entire amount can be used free of tax if utilized for qualified higher education expenses
* If the beneficiary receives a scholarship but still wants to withdraw funds from the 529 plan that will not be used to cover "qualified higher education expenses
," the earnings (not contributions) on the amount withdrawn would be taxed at the scholarship recipient's tax rate, but will not be subject to the 10 percent additional federal tax penalty.
529 plans are tax-advantaged state savings programs in which the earnings on plan contributions are allowed to grow tax-free and plan distributions are not taxed to the extent they are used to pay qualified higher education expenses
. Many states offer eligible taxpayers either a deduction or a credit for contributions made to a 529 plan.
529 Plans can be used to help pay the costs of qualified higher education expenses
at colleges nationwide.