Some things that are too good to be true, actually are GOOD and TRUE!
The 529 College Savings Plan should be rephrased, “the plan that keeps on giving”. The 529 plan is what we call the triple whammy because if used properly, it is perhaps the only investment account that can wield three powerful tax benefits.
1. Tax-free distributions if used to pay qualified education expenses.
2. Potential state tax deduction for contributions (Connecticut, Michigan, New York and Pennsylvania are among the states where the maximum deduction for a couple is at least $10,000)
3. Contributions and earnings grow tax-free.
Bonus: Powerful when coupled with the American Opportunity Tax Credit, Hope Credit or Lifetime Learning Credit.
Education:
There are several ways to save for the impending costs of college. Some of the investment or savings vehicles that are available to taxpayers are as follows:
1. Coverdell Education Savings Accounts
2. 529 Plans
3. Prepaid College Plans
In this lesson, we will focus on the 529 Plan, a tax-advantaged investment vehicle in the U.S. designed to encourage saving for the future higher education expenses of a designated beneficiary. A 529 plan (named after a section of the tax code) is a powerful way to shelter investment income from tax. It works like a Roth retirement account. There’s no deduction on your federal income tax return for the money you put in, but any money coming out is free of income tax. So a 529 account is way better than most tax shelters (like variable annuities), which merely defer tax
|
Advantages |
Disadvantages |
| Anyone can set up an account for either themselves, their spouse, dependents, grandchildren, neighbor, etc. (you get the picture) | Low rate of return |
| Broad application for educational purposes | If the money is ultimately not used for eligible education purposes, any growth is taxed as ordinary income, and subject to a 10 percent penalty. |
| Principal grows tax-deferred | The ongoing investment of the account is handled by the plan, not by the donor. |
| Distributions for the beneficiary’s college costs are exempt from tax | An account owned by a parent for a dependent student is reported on the Free Application for Federal Student Aid (FAFSA) as a parental asset. |
| No contribution limit | |
| Great to use with Sec. 2503 giving | |
| Donor maintains control of the account | |
| Account is out of the owner’s (donor) estate | |
| There are no income limitations that make you ineligible for an account | |
| Most states have no age limit for when the money has to be used. If the child gets a scholarship, any unused money can be withdrawn without paying a penalty (just the tax) | |
| Money not used for one beneficiary, may be used for another who is a family member. | |
| Simple Enrollment | |
| Low contribution amounts allowed (as low as $25) | |
| Nearly all states sponsor their own plan. |
Example:
Say you put $10,000 in now, then withdraw the money five years later when it has grown to $13,000. The $3,000 gain is exempt from state and federal income tax, provided the entire $13,000 is used for higher education.
Resources:
College Savings Plans Network (CSPN) (http://www.collegesavings.org/viewState.aspx?state=FL) – works to improve 529 plans at the federal and state level and serves as a clearinghouse for information among existing programs.
Important terms from this lesson:
|
Term |
Definition |
| 529 Plans | A tax-advantaged investment vehicle in the U.S. designed to encourage saving for the future higher education expenses of a designated beneficiary |
Education and Action 