When Congress passed the Small Business Job Protection Act of 1996, a provision was included to make it easier for families to save for college. Named after a section of the Internal Revenue Code (just like the familiar 401(k) retirement plan), the Qualified Tuition Program (QTP), or 529 plan, formally recognized the need for families to set aside significant assets for college by authorizing such compelling advantages as tax-deferred accumulation and favorable tax treatment of qualified withdrawals. Here's what most 529 plans have in common:

Broad Availability
529 legislation allows for both college savings programs and prepaid tuition programs. Generally, college savings programs are available to any U.S. resident from any state.

Significant Tax Advantages
There are four significant tax benefits when you save through 529 plans:

Tax-deferred accumulation- Investment earnings in a 529 college savings plan accumulate federal income tax-deferred until the money is withdrawn, meaning that your savings are able to grow faster than comparable taxable accounts. State income tax treatment on contributions may vary.

Federal tax-free¹ earnings- Investment earnings will be distributed federal income tax-free¹ when used for qualified higher education expenses.²

Reduction in estate taxes- Contributions are considered completed gifts and are generally excluded from the account owner's estate.³

Accelerated gift tax treatment- 529 plans qualify for a special gift tax exclusion. You can elect to contribute up to $55,000 per beneficiary free of gift taxes, $110,000 if married filing jointly (that's five times the annual gift tax exclusion) in one lump sum, to as many beneficiaries as you desire. Once you make this maximum gift, however, you cannot make any other gifts to that beneficiary for five years. Alternatively, you may make annual contributions of up to $11,000 per beneficiary (or $22,000 if married filing jointly) and qualify for the gift tax exclusion. Contributions over this lump sum amount will also utilize the generation skipping tax effective exemption amount, currently $1,060,000.

Control Over Assets and Beneficiaries
Unlike other savings plans that transfer control of the assets once the child reaches a certain age, 529 college savings plans allow the account owner to maintain control over the assets for the life of the account.

Broad use of assets- You can use the plan assets to pay for qualified higher education expenses such as tuition, fees, room and board, books and supplies at any accredited post-secondary institution in the U.S. This includes 2-year and 4-year undergraduate programs, technical schools, plus graduate and professional schools.

Flexible beneficiary designation- You can change beneficiaries to another "family member" (as defined in IRC Section 529) of the original beneficiary at any time without penalty. You can name anyone as a beneficiary - a child or adult - even yourself.⁴

Penalty-free withdrawals- Funds can be withdrawn without penalty if the beneficiary receives a scholarship (withdrawals can be made up to the scholarship amount), or in the event of the death or disability of the beneficiary. Ordinary income taxes would be owed on any investment earnings included in gross income.

^{1 The tax legislation exempting earnings on qualified withdrawals from federal income tax expires on 12/31/10, requiring the Congress to enact some further action to secure these provisions prior to this date in order for them to remain in effect following 12/31/10.}

^{2 For withdrawals not used for qualified higher education expenses, earnings are subject to income taxes at the distributee's rate plus a 10% federal tax penalty.}

^{3 If the account owner dies within five years of the funding date, a portion of the assets in the 529 plan will be included in the owner's estate.}

^{4 There may be estate gift or generation-skipping tax consequences depending on who the new beneficiary is. Your investment professional can provide you with more information.}

^{5 All 529 plan assets, including earnings, established for the benefit of a particular beneficiary must be aggregated when applying this limit. New contributions will not be allowed once this limit is reached. Earnings, however, will continue to accrue. Consult your tax advisor for how 529 tax treatment would apply to your particular situation.}