529 Plans Help Save for College
College tuition for a child born in 2012 is predicted to be more than $100,000 per year by the time this child reaches college age. Parents who plan to send their kids to college know that they need to start saving early.
One good to save for college is through a 529 plan. Some new parents, in fact, now open a 529 account for their newborns and register for cash gifts.
A 529 plan is a tax-advantaged savings plan, authorized by the U.S. Internal Revenue Service. It is designed to encourage saving for future college costs. Sponsored by states and educational institutions, 529 plans are also called qualified tuition plans.
Contributions to a 529 Plan
Earnings in 529 plans are not subject to federal tax. As long as the money is used for qualified educational expenses, you can withdraw it without paying any capital gains taxes. States may offer tax breaks as well, like an upfront deduction for your contributions or income exception on withdrawals.
Distributions from a 529 Plan
Money from a 529 plan can be used for tuition, fees, book, supplies and equipment required for study at any accredited college, university or vocational school in the United States (and some foreign schools). It can also be used for room and board for students enrolled at least half-time.
Distributions not used for qualified educational expenses will be taxed as ordinary income and (subject to a few exceptions) subject to an additional 10-percent penalty on the gains portion. Any unused amounts can be transferred to other qualified members of the beneficiary’s family.
Pre-Paid Tuition Plans
In a 529 pre-paid tuition plan, you can pre-pay all or part of the costs of an in-state public college education. The account can also be converted for use at private and out-of-state colleges. Currently, 12 states provide a prepaid tuition plan, available to state residents.. They may be administered by states or higher education institutions.
College Savings Plans
In 529 college savings plan, contributions are invested in mutual funds. The state sets up a plan with the asset management company of its choice, and individuals open accounts with that company. Assets in a college savings plan can be used to pay for educational expenses in any state.
A Lawyer Can Help
The law surrounding the creation and proper use of 529 plans to pay for college can be complicated. Plus, the facts of each situation are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a qualified tax lawyer.