ICI Urges Conformity in Alabama, Pennsylvania 529 Plan Legislation

Washington, DC, February 6, 2006 - In letters to the Alabama Legislature and the Pennsylvania General Assembly, the Institute supports state legislation that would provide tax-free treatment for qualifying distributions from 529 College Savings Plans.

Background
To encourage greater savings for higher education expenses, federal and state lawmakers developed qualified tuition programs to make higher education financially accessible to more Americans. Section 529 college savings plans allow individuals to contribute to an account established to pay a student's qualified higher education expenses at any eligible educational institution. Contributions to 529 plans are made with after-tax dollars and any earnings grow tax-free at the federal level. Earnings withdrawn from 529 plans to pay for qualified higher education expenses are free from federal income tax for state-sponsored programs and programs of any eligible higher education institution.

State-tax treatment of college savings plan contributions, earnings, and withdrawals vary from one state to another. A number of states allow residents who participate in their own state's plan to claim a partial or full state income tax deduction on contributions. In addition, many states provide residents with a state tax break on earnings distributions from 529 plans that are used to pay qualified college expenses. Alabama and Pennsylvania currently are two of only three states in the nation that do not conform their treatment of 529 plans to federal law.

ICI Position
The Institute's letter to the Alabama legislators expresses support for HB 62, legislation that would encourage college savings. However, ICI also encourages legislators to amend the bill to extend tax-free treatment of earnings and amounts used to pay for qualified higher education expenses to all 529 plans. ICI notes that such a change would fully conform Alabama rules to federal law and provide an effective incentive for the use of education savings programs.

ICI also urged Pennsylvania legislators to support HB 529, which would encourage Pennsylvania residents to invest in qualified state tuition programs by providing them with an exclusion from gross income for amounts withdrawn from any state 529 Plan for qualified higher education expenses. HB 529 would conform Pennsylvania tax treatment of qualifying withdrawals from 529 Plans to federal law. The Institute notes that federal conformity will make it easier for Pennsylvania families to save for college, and would simplify tax compliance for Pennsylvania residents.

Related Links
A section of this website is devoted to education savings issues.