Parenthood is a strange combination of incongruences. By the time you get your child home from the hospital, you are probably already wondering how to save on college expenses. And with The cost of college is rising faster than inflationYou are not wrong to think about college while your child is still wearing diapers. In this article, we're going to talk about 529 plans – what they are, how to use them, and why they can be one of the best ways to save college expenses.
What is a 529 plan?
A 529 College Savings Plan (usually just referred to as a 529 Plan) is a vehicle that is primarily used by parents and guardians to save on their loved ones' college expenses. It is named according to Section 529 of the Tax Code and was first introduced in the 1990s. A 529 plan is a shortcut to refer to one of several different types of post-secondary education expense account.
Tax benefits of a 529 plan
A 529 plan occupies the same trail as a Roth IRA can for individual retirement planning. That means you're contributing an after-tax income to your 529 plan. Then the money can be deposited in your 529 account as you wish. When you're ready to use the money, you can withdraw the capital and all income tax-free as long as you use it on qualified education expenses.
There are many different 529 plans
529 plans were first introduced in the 1990s by the individual federal states and not by the federal government. Under the Small Business Job Protection Act of 1996 and the Taxpayer Relief Act of 1997, the framework of 529 plans was codified in the Tax Code.
Still, most of the 529 plans are administered by individual states. While most state 529 plans allow foreign investors to use the state you live in, using the 529 plan often offers state tax benefits. For example, in Ohio, contributions of up to $ 4,000 per beneficiary can be deducted from your Ohio taxable income. One thing to look out for with the various 529 plans is: Compare the various fees associated with the account. If your state's 529 plan includes higher than average fees or fund expenses, it may make sense to join another state's plan even if you don't get any state tax breaks.
It may seem a bit overwhelming to have several different options, but it is important to Don't let that stop you from making a 529 plan. You will definitely be one step ahead by investing in a 529 plan instead of simply keeping that money in a low-interest savings account.
Who can (and how much!) Contribute to a 529 plan?
There is no set limit to how much you can contribute to a 529 plan, although some section plans have their own limits on annual contributions. When contributing to a 529 plan for a beneficiary who is not dependent on you (such as a grandchild), understand that there are limits that you can contribute without a gift tax will apply. Currently, you (and your spouse) can give $ 15,000 per year per beneficiary without being subject to gift tax.
What can you use a 529 plan for?
You, the account holder, can take money out of your 529 plan at any time, tax-free, as long as you use it for qualifying distributions. Eligible expenses include all expenses related to elementary or college education, including tuition, books, computers, and even room and board. As of January 2018, you can also use 529 plans pay for their children to attend private elementary and high schools.
You can also change the beneficiary of a 529 plan at any time. This can be useful if you have multiple children. You can make contributions for each of your children (may be distributed to take advantage of tax break restrictions). You can then match or assign the beneficiary of the account to the child currently incurring education costs. This strategy can also work if you have a child who chooses not to go to college. Instead of withdrawing the money and paying a 10% fine, you can simply switch the beneficiary of the 529 account.
Another benefit of a 529 plan is that the account (and money) is in your name, which means that you are in complete control of the account. This will prevent your child from using or accessing the funds without your consent. Additionally, Money on your behalf is treated more favorably than money on your student's behalf in determining your expected family contribution (EFC) for financial assistance.
Hopefully this information will help you in your efforts to find the best plan for college and other college expenses.
Dan Miller (26 posts)
Dan Miller is a freelance writer and founder of PointsWithACrew.com, a website that helps families travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 children.