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| 529 Plans: One Smart Way To Save For College |
Mani Ghedia
01/18/2007
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According to The College Board (a not-for-profit educational association), for 2004-2005 average costs per year totaled $5,132 for state universities and $27,516 for private universities*. If these figures are unsettling, this number might provide some reassurance: 529.
Attractive tax benefits
A 529 College Savings Plan lets you contribute generous amounts to a tax-advantaged account to pay for college costs. Aggregate contribution limits vary by state but are often above $200,000 per beneficiary.
A 529 Plan account can grow federal income tax deferred. Withdrawals are also free of federal income taxes when used for qualified educational expenses such as tuition, books, fees, room and board If used for other purposes, the earnings portion of the withdrawal is taxable as ordinary income and subject to a 10 percent federal tax penalty unless the beneficiary dies, becomes disabled or receives a scholarship. State tax penalties may also apply. There are also important state income tax advantages in addition to tax-free withdrawals such as deduction for contribution for qualified purposes. Be sure to understand your state tax benefits because many states offer state tax incentives for 529 Plan investing only to residents who enroll in their own or the beneficiary’s own home state plan. This means that state tax advantages are generally not available to persons who enroll in the 529 Plan of a state where neither they nor the beneficiary are residents.
Ample flexibility
You may be able to start funding a 529 Plan with as little as $25 a month. 529 Plan accounts may be opened for the benefit of a relative, a friend or even yourself if you plan of funding your own post-secondary or graduate education. You may also change beneficiaries anytime, provided the new one is a family member of the previous one, as defined in Internal Revenue Code Section 529.
* Figures include tuition, fees, room, board, books, supplies, transportation and other expenses for residential students.
* Unless Congress renews or extends the current tax provision, 529 Plan withdrawals will becomes federally taxable after 2010, but earnings would still accumulate tax-deferred until withdrawn.
* Some states will impose a state tax penalty on nonqualified withdrawals, and this penalty would vary by state but does not currently exceed 10 percent.
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