What are 529 College Savings Plans and Why They Matter For Your Children's Education


A 529 college savings plan is another way for U.S. families to prepare for the high costs of college. 
Named after section 529 of the Internal Revenue Code, this investment vehicle is another tax-advantaged plan that is designed to give incentives for education planning. There is one custodian and one beneficiary for each account. The beneficiary can be anybody, even yourself.
State 529 Plans
Each state manages their own 529 plan and usually offers incentives for its residents to utilize the in-state version. Some states offer state tax deductions for contributions to residents. If you feel the tax deduction is not as important as performance, you can do the research and pick a better program and invest in that plan.
There are two types of 529 plans: the prepaid tuition program and the savings program.
529 Prepaid Tuition
The prepaid plan gives you the ability to purchase future tuition at today’s prices. It generally covers all state and community colleges and may encompass private schools as well. It is best to confirm if your state offers this program and what the rules and limitations are. In this program, all funds are pooled together and invested to cover the increase in tuition over time.
The tuition can be purchased in a lump sum or paid through monthly installments. Be aware, having a prepaid tuition plan does NOT guarantee that the student will be accepted to that school.
529 Savings Program
The savings plan works much like a 401k does, in that the custodian has the choice of choosing the different mutual funds offered in the plan to invest in.  There are generally some kind of maintenance fee associated with the plan, and sometimes mutual fund-type commissions. Each state offers different options and should be researched before you make a decision.
529 Contributions
Currently the contribution limits follow the rules for gifting. $15,000 may be contributed per beneficiary per person. There is a 5-year “pay-forward”in which you can put up to five years worth in at one time. This works out well for estate purposes; Grandparents can each contribute $75,000 and remove the funds from their estate for tax purposes.
Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary's qualified higher education expenses. Limits vary by state, ranging from $235,000 to $520,000. This amount represents what the state believes to be the full cost of attending an expensive school and graduate school, including textbooks and room and board. If your plan is close to the limit don't worry about future earnings in the account pushing it over. The funds can remain in the account without penalty, but the family will not be able to make any future contributions unless a market drop brings the account balance back down.
State tax benefits
Over 30 states, including the District of Columbia, currently offer a state tax credit or deduction up to a certain amount. For example, contributions to a New York 529 plan of up to $5,000 per year by an individual or $10,000 per year by a married couple filing jointly are deductible in computing state income tax. But that doesn't mean New York parents are limited to contributing $10,000 to their 529 plan. If they choose to take advantage of the annual gift tax exclusion and deposit $15,000 this year, the entire amount will grow federal tax-free, but only they'll only be able to deduct the first $10,000 from their state income tax.
There are no income or age limitations to the savings plan. Anybody can contribute and take advantage of the opportunity. 529 plans are also not factored in when applying for financial aid.
529 Distributions
Qualified withdrawals are federally tax-exempt, and in most cases, state as well.  529s can only be used for secondary education. These funds can be used at any accredited college or university in the US, and in some cases, abroad as well.
If the beneficiary does not go to college or receives a scholarship, there are options to do something with the funds. One alternative is that they can be transferred to another member of the beneficiary’s family. If the funds are withdrawn for an unqualified reason, the earnings (but not the original contribution) would be subject to both federal and state taxation as well as a 10% penalty.
College Savings Plan
It is estimated that for children born this year, the average cost of a four year college education will cost over $250,000. So start saving now, even if it’s only one dollar at a time.

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