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529 plans

529 Plan: How to Save Money for College

May 2, 2009

in Money Management

It’s never too early to start thinking about your children’s college education. The sooner you start saving, the greater the chance your child will have enough money to get through college with no worries. But when considering college savings, many parents are unsure just what they should do with the money.

You could stuff it in a sock drawer, but it would have no chance of drawing interest there. A savings account might be slightly better, but any interest earned would be taxed. A 529 plan is a much better option.

529 plans are similar to 401K plans, but they’re for higher education instead of college. Parents, grandparents or anyone else can put money into one for a specified beneficiary. Any interest earned is tax-deferred, and if the money is left in the account until the child goes to college and used for college expenses, there is no tax liability.

There are two basic types of 529 plans. The College Savings Plan is the most similar to a 401K. Investors are allowed to choose from a variety of investment options for the plan, and their money earns interest according to the investments’ performance. The Prepaid Tuition Plan is different in that it allows contributors to purchase tuition credits at current prices to use in the future.

Most 529 plans are run by states. Every state offers at least one plan. Each plan is different, but most require either the plan owner or beneficiary to be a resident of the state issuing the plan. Some allow residents of any state to invest, but out-of-state residents may not be eligible for all available tax benefits. In most cases, the funds from state-run plans may be used at any college or university, even if it is not located in the same state.

There are also 529 plans offered by colleges and universities. All plans offered by educational institutions are prepaid tuition plans. Unlike state-run prepaid tuition plans, however, those run by schools are not guaranteed by the government.

The funds withdrawn from a 529 plan must be used toward eligible expenses. With prepaid tuition plans, these generally include only tuition and mandatory fees. Some plans, however, offer an option to purchase room and board credits or use extra tuition credits for these expenses. Money withdrawn from college savings plans may be used for tuition, fees, books, computers and room and board.

A 529 plan can help you save money for education without incurring a huge tax bill. These plans are easy to set up, and all of the investing is taken care of for you. All you need to do is make contributions and make sure that the beneficiary uses the funds properly when the time comes.

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529 Plan and Tax Advantages

April 27, 2009

in Money Management

If you want to send your children to college, starting to save while they are young will leave you better prepared to handle the expense. We all know that it’s best to put money into something that will draw interest, but what about the tax implications? Wouldn’t it be great if we could invest in something similar to a 401K that would pay out tax-free when it was time for college?

Actually, we can. It’s called a 529 plan, and it offers the opportunity to save up for higher education without forfeiting a percentage of the interest earned to the government. Named from Section 529 of the Internal Revenue Code, 529 plans have only recently become well known. But their tax advantages have led to a boom in popularity, and they are currently one of the top methods of saving for college.

The 529 plan offers a number of tax advantages. These include the following:

* Contributions may be deducted from state income tax in many states. This can reduce one’s state tax liability each year.

* Interest accrued in a 529 plan is tax-deferred. Early distributions and withdrawals that are not used for education expenses may be subject to taxes and penalties. But if the funds are used strictly for the higher education of the beneficiary, they are exempt from both federal and state taxes.

* Most states have high maximums for contributions to a 529 plan. Some allow for contributions of as much as $300,000 per beneficiary. That allows for a significant amount of interest to accrue tax-free.

* A 529 plan can be useful in estate planning. The assets in the plan are not counted as part of the owner’s estate, yet they can be reclaimed at any time. Reclaiming the assets usually results in income tax and penalties, but the estate tax may be reduced without using the money for education in some cases.

* In the event that a 529 account loses value, the funds may be withdrawn and the losses deducted from taxes.

Other Advantages

In addition to tax advantages, 529 plans are advantageous in several other ways. These include:

* All investments are handled by the program manager. All the plan owner has to do is choose the type of investment he wants to pursue and make contributions. The rest is taken care of by knowledgeable investors.

* A 529 plan can be set up so that it does not affect eligibility for financial aid. Accounts owned by students and parents can hurt eligibility, but if the account is set up by a grandparent or other individual, the amount is not considered in figuring the family contribution.

* Prepaid tuition plans are often backed by the state. This means that they cannot lose value.

A 529 plan can be used to ensure that your child has the opportunity to go to college. And unlike many other investments, its interest is not subject to taxes. If you’re looking for a way to save for education without losing a portion of the interest gained, a 529 might be the plan for you.

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