“Section 529 Qualified Tuition Plans: Sometimes It Is Not Too Good To Be True” by Jennifer K. Huckfeldt

Section 529 Qualified Tuition Plans, which receive very favorable tax treatment, are named after the section of the Internal Revenue Code authorizing the plans. There are actually two types of plans authorized under 529, Tuition Credit Plans and College Savings Plans.
Tuition Credit Plans. With these plans, credits or certificates are purchased which can be used in the future to pay the percentage of tuition that was pre purchased. Usually the purchase price is less than the current tuition rate. The advantage of these plans is to provide a hedge against the cost of future tuition increases by locking in tuition at the institution’s current rate and any increase in fees is not taxed. For example, assume in 2004 one year of tuition is purchased at a cost of $10,000. In 2011, the certificate is redeemed to pay for one year’s tuition when the tuition fee has increased to $18,000. The increase in tuition fees in the amount of $8,000, which does not have to be paid, is not subject to income taxation. State institutions usually participate in these plans and eligible private institutions also have plans. You can review one private plan allowing tuition purchases to be utilized at more than 200 independent colleges at www.independent529PIan.org.
College Savings Plans. This program allows cash contributions to be made into an account for a designated beneficiary that is maintained by a state, state agency or state instrumentality. In Missouri, the program is called the Missouri Saving For Tuition (MOST) Program. The accounts grow income tax free, and Federal and Missouri income taxes are not imposed on distributions so long as the money is utilized to pay for the qualified higher education expenses of the designated beneficiary. Such expenses can include, in addition to tuition and fees, room and board up to a designated amount. Contributions to the plan also qualify for a Missouri income tax deduction of up to $8,000 per donating taxpayer, per year. You can log onto www.missourimost.org for a complete overview of Missouri’s plan.
Comparing the Plans. The Savings Plans are more flexible, because the funds can be utilized to pay for expenses at any eligible education institution, compared to Tuition Credit Plans wherein tuition is pre purchased at a particular institution or group of institutions. On the other hand, Tuition Credit Plans guarantee tuition for a specified fee paid today, whereas with the Savings Plan, the tuition and fees at the institution in effect at the time the beneficiary attends the school must be paid.
Note. Although it will hopefully be extended or made permanent, the law allowing distributions to be free from federal income taxes is set to expire on December 31, 2010.