529 PLANS

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Bush tax proposals unveiled for fiscal 2005

(February 2, 2004) - Several items in the administration's tax proposal package would impact college savings:

1) The tax exclusion on qualified 529 withdrawals would be permanently extended beyond the current 2010 expiration date.

2) The new Lifetime Savings Account (LSA) would permit up to $5,000 in annual contributions per saver to accumulate tax-free and be used tax-free for any purpose. All taxpayers could establish an LSA. Balances in a Coverdell ESA or 529 plan, subject to dollar limitations, could be rolled over to an LSA tax-free before 2006.

3) States could offer LSAs alongside their 529 plans.

4) The income limitation on Coverdell ESA contributors would be eliminated.

5) "New" 529 accounts would be subject to a new program-imposed excise taxe on nonqualified distributions above $50,000 cumulatively: 35% on the next $100,000 of nonqualified distributions, and 50% on nonqualified distributions above $150,000.

6) "New" 529 accounts would have to be distributed to the beneficiary at age 35, or the beneficiary changed to a new family member under 35. Beneficial ownership would reside with the beneficiary, not the donor.

7) "Old" 529 accounts would be grandfathered, i.e. remain subject to old law, unless an election were made to treat the account according to the new rules.

Click on the link below for a more complete discussion of the administration's proposals impacting 529 plans. You can also view the Treasury Department's "Blue Book" explanation of the revenue proposals contained in the Bush budget.

For more information, click here.

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