In 2017, K–12 public, private, and religious school tuition were included as qualified expenses for 529 plans along with post-secondary education costs after passage of the Tax Cuts and Jobs Act.
[citation needed] Michigan delayed its own launch so that a ruling could be requested from the Internal Revenue Service (IRS) regarding the tax aspect of arrangement.
[citation needed] At one point MET sold prepaid tuition contracts that were below market value, and the program had to be adjusted with appropriate pricing.
[citation needed] Subsequently, Congress has passed new legislation authorizing qualified state tuition programs.
[citation needed] Section 529 advanced to the Clinton administration's agenda and became part of Taxpayer Relief Act of 1997 (TRA).
The TRA made changes such as deduction on student loans, penalty-free IRA withdrawals for higher education, and adding room and board to the list of qualifying expenses.
[citation needed] Another provision was added to the bill to make Section 529 distributions tax-free, not just tax deferred when used for college.
[citation needed] In 2001, when George W. Bush was president, new tax bills were crafted in both the Senate and the House of Representatives containing the previously vetoed changes.
[citation needed] With limited Democratic support,[8][9] the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 was signed into law on June 7, 2001.
[citation needed] Congressional leaders decided to insert a provision in the Pension Protection Act of 2006 (PPA) that would make all EGTRRA charges to Section 529 permanent, including tax-free treatment for qualified distributions.
The states partnered up with the professional investment community, which allowed them to offer 529 plans with the feel of mutual funds.
[citation needed] Other changes that have resulted in a growth in adoption include: federal legislation regarding taxes, financial aid, asset protection; on-going program improvement; lowering of expenses; generous state incentives; positive media coverage; and college savings registries that allow people sign up for the program.
[13] In his 2015 State of the Union address, President Obama proposed removing the tax-free status of distributions of 529 plans.
[14] The Tax Cuts and Jobs Act of 2017 heavily expanded 529 plans to include K–12 public, private, and religious school tuition.
[17] Secure ACT 2.0 of Jan 2023 allows for tax and penalty free rollovers from 529 accounts to Roth IRAs, under certain conditions.
However, on December 12, 2019, the SECURE Act was signed into law, which allows for 529 withdrawals for "principal or interest on any qualified education loan", under certain conditions:[21] A distribution from a 529 plan that is not used for the above qualified educational expenses is subject to income tax and an additional 10% early-distribution penalty on the earnings portion of the distribution.
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, New Hampshire, Washington and Wyoming do not have state income taxes.
Having selected which 529 plan to use, the donor completes a simple enrollment form and makes a contribution (or signs up for automatic deposits).
[16] Another benefit associated with 529 Plans is the ability to transfer unused amounts to other qualified members of the beneficiary's family without incurring any tax penalty.
[24] According to the IRS website (Publication 970), this type of transfer is known as a Rollover and is explained at length in their Qualified Tuition Program (QTP) section.
For example, if $50,000 is contributed to a 529 plan, where it grows to $60,000 over time, and an unqualified withdrawal is made for the entire amount, the $10,000 gain is taxable and a 10% penalty on the $10,000 is applicable (i.e.
[25] Paying college expenses directly from a 529 account may reduce eligibility for the American Opportunity Tax Credit, due to IRS coordination restrictions.
To claim the full credit (in addition to meeting other criteria, such as income limits), $4,000 of college tuition and textbook expenses per year should be paid from non-529 plan funds.