| 529- College Savings Plan |
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If you are concerned about saving for your child’s college education a
529 plan is a great way to do it. A 529 plan is a state-operated
investment plan that gives families a federal tax-free way to save
money for college. The plan was authorized by Congress in 1996,
and they became officially known as qualified tuition programs (QTPs),
however they are more commonly referred to as "529 plans," "state 529
plans," or "section 529 plans" after the section of the IRS code that
provided the plans with special tax breaks. Although 529 plans
differ from state to state, they are all exempt from federal income
tax, which can boost your college fund immensely.
Two Different 529 Plans There are two 529
plans. They are college savings plans and prepaid tuition plans.
Every state offers one of the options if not both. These college
savings plans allow parents to use their plan funds for college
expenses at any college whereas the prepaid tuition plans allow parents
to lock-in future tuition at in-state public colleges at the present
price. Fast 529 Saving Plan Facts -
Any Earnings from a 529 plan are exempt from federal taxes, as well as
withdrawals, just as long as they are put towards paying college costs. - Some states waive state taxes for residents, while other states permit deductions on contributions. - 529 plans have maximum contribution limits with some reaching as high as $250,000 per beneficiary. - You’ll find in most states that experienced investment companies like TIAA-CREF are hired to manage the 529 accounts. -
If the funds are withdrawn for other purposes besides education, the
earnings are then subject to a 10 percent penalty as well as federal
income tax. States may assess their own penalties. -
529 contributions are considered completed gifts and excluded from your
estate making it a great gift for Grandparents to give. Grandparents
are also allowed to switch beneficiaries to other grandchildren. -
Read all rules and restrictions for a 529 saving plan because they are
bound to differ and change. Be sure to request the most recent
plan details. College Saving Plan vs. Prepaid Tuition Plan A
college savings plan may provide you with more options than a prepaid
tuition plan. With a college saving plan it gives you more
flexibility in college choice, which is an important advantage because
a savings plan can begin 10-15 years or more before the college
selection process gets underway. If you are one for prepaid
tuition, then the college savings plan might be the right plan for you
by using four years of in-state public tuition as a savings goal.
Also if you child qualifies for need-based aid, the federal formula
will ask you to give less from a college savings than from a prepaid
tuition plan giving the college saving plan another advantage. 529 Tips -
Do your research. Like any other investment, it's in your hands to make
sure you know exactly what you are getting involved in. -
Contact your local office who is responsible for the states college
savings plans information which is usually the state's treasury or
finance office. - Talk with a financial adviser and/or tax adviser before making any choices that have tax or estate implications. -
When signing up for a college savings plan make sure you're aware of
all fees and penalties for they will differ from each plan. Each
plan has its own rules about early withdrawals, transfers, refunds, or
using the money for other purposes other than education. |
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