Military Family Tax Relief Act
Enhances 529 Plans

On Veterans Day, 2003 President Bush signed the Military Family Relief Act of 2003 into law adding a number of beneficial provisions for military families and military personnel. One of these changes affects 529 College Savings Plans.

Specifically, the Military Family Tax Relief Act allows for penalty free withdrawals from Coverdell Savings Accounts and 529 College Savings Plans if the person for whom an account was established obtains appointment to a military service academy. As background, attendance at a military academy has never been considered to be a "scholarship" for purpose of Coverdell Savings Accounts and 529 College Savings Plans.

Under previous 529 College Savings Plan law, if a student received a traditional scholarship to college, then funds saved in a 529 Plan could be withdrawn and not subjected to the 10% penalty tax (although the funds withdrawn would be subjected to ordinary income tax).

Attendance at a military service academy was never considered a scholarship, and as such, if assets were withdrawn from the 529 Plan originally established for the student who was attending the military academy, the 10% penalty would apply. The recent legislation signed by President Bush eliminates the 10% penalty for these military service attendees.

 

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