All states sponsor tax-advantaged so-called 529 college savings programs to help families save for future college costs. In general, 529 programs don’t have any eligibility income limitations and each state’s plan has its own terms and features.

Q: What are the two main types of 529 programs?
Prepaid tuition plans allow you to pay tuition in advance and lock in the cost based on today’s tuition prices. These plans pool investments and aim to keep pace with tuition increases in that state.

You can use savings in prepaid tuition plans for tuition at any eligible public university or private college in the country. The amount, however, is based on tuition costs at a state’s public universities.

College savings plans allow you to save money in a special college savings account for tuition and fees, books and supplies, and certain room and board expenses. These plans provide variable rates of return based on the investments you choose from the available options.

College savings plan investments are managed by outside investment companies. You can use savings in these types of plans at any eligible public or private college or university nationwide.

Q: What are the tax benefits?
When you make qualified withdrawals from a 529 plan your earnings are free from federal income tax.

State rules governing 529 programs vary. Some allow state residents to deduct the full or a partial amount of their contribution from state income taxes. And most states allow residents to exempt earnings from state income tax.

Some plans are open to residents of all states, although out-of-state participants may not get the state tax breaks. And some states tax earnings withdrawn from out-of-state plans, generally at the student’s state tax rate.

Along with the rest of the Tax Act of 2001, the provision that made 529 earnings free from federal tax is set to expire at the end of 2010. Therefore, if Congress doesn’t extend the tax break or pass new legislation, earnings will revert to being taxed at the student’s federal income tax rate.

Q: What if my child or grandchild doesn’t attend college or I withdraw my money for non-college use?
If the beneficiary of your account doesn’t attend college you may defer the account for later use or transfer it to another member of your family. Family is defined broadly, including brothers, sisters, sons, daughters, nephews, nieces, first cousins, certain in-laws, and spouses of these relations.

You can withdraw your savings for non-qualified higher education expenses, subject to each plan’s rules. But you’ll owe federal income taxes on the earnings, generally at your income tax rate. Plus, you’ll incur a 10% federal penalty tax on earnings, unless an exception applies. The exceptions include a student’s disability, death, or receipt of a scholarship.

For more information about college savings programs please contact Michael K. Coldwell or Benjamin L. Zurvalec, the MEMBERS Financial Services Representatives serving the members of Dow Chemical Employees’ Credit Union, at (989) 835-7794 or (800) 835-7794 extension 4572.

This article is not intended as tax advice. State tax laws vary, consult a tax professional regarding your specific taxation issues.

FR120128-F90A (0604)