A 529 plan* is an investment plan operated by a state, designed to help families save for future college costs. As long as the plan satisfies a few basic requirements, federal tax law provides special tax benefits to the plan participant. There also may be state tax deduction benefits depending on your state’s plan. If you choose to invest in a 529 plan, you are not restricted to just the plan offered by your own state. However, there may be state tax implications for selecting another state’s plan.
One of the key advantages of a 529 plan is the income tax breaks on the non-deductible contributions. Any earnings grow tax-free for as long as the money stays in the plan. And when the plan makes a distribution to pay for the beneficiary’s college costs, the distribution is federal tax-free as well.
Another major advantage is that the account holder stays in control of the assets in a 529 account. The named beneficiary has no rights to the funds. In fact, the account holder has the flexibility to change beneficiaries at any time, but only once per year. The account holder decides when withdrawals are taken and for what purpose. Most plans even allow account holders to reclaim the funds for themselves any time they desire. However, earnings will be subject to income tax and an additional 10% penalty on non-qualified withdrawals.
In addition to these benefits, 529 plans are one of many ways to save for college. Once you decide on a plan, the assets are professionally managed either by the state treasurer’s office or by an outside investment company. And everyone is eligible to take advantage of a 529 plan—there are generally no income limitations or age restrictions.
Coverdell Education Savings Accounts
A Coverdell Education Saving Account is an IRA especially designed for education costs. This custodial account enables you to contribute up to $2,000 per beneficiary per year of earned income after tax. Income limitations may apply. Earnings may be withdrawn tax-free for qualified educational expenses, from elementary school through college. The investor chooses the investment options. This type of account is an ideal savings tool for primary and secondary education in private schools.
Education Planning Raises Many Questions
- What will he be when he grows up?
- Where will she go to school?
- Will they be the first in the family to attend college?
The most important thing you can do to secure a child’s educational future is to start planning today. We know the questions to ask and have the answers you need.
*Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
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