When it’s time to pay college tuition, you may use the funds to pay for any accredited
college or university in the country.*
When it’s time to pay college tuition, you may use the funds to pay for any accredited college or university in the country.*
A 529 Plan is a way for families to save for future college costs. When it’s time to pay college tuition, you may use the funds to pay for any accredited college or university in the country.* Other qualifying expenses include books and education-related expenses, such as a laptop. 529 Plan contributions aren’t tax deductible, but owners of the plan don’t pay tax on the increase in value on the initial investment. With the cost of college tuition rising every year, it’s never too early to start saving.
529 Plans are popular because of the tax advantages. In fact, the plan gets its name from Section 529 of the IRS Code. Tax advantages include:
- Earnings grow federal tax-free
- Qualified withdrawals are tax-free
- State tax rules vary by state and may offer a full or partial tax deduction or credit
- Don’t have to report contributions on federal tax return
- No Form 1099 issued until withdrawal of funds
- Deposits qualify for the gift tax exclusion (in 2017 – up to $14,000 per individual or $28,000 for married couples filing jointly)
- Estate contributions between $14,000 and $70,000 count in the first year as if made over a five calendar-year period
If you make unqualified (non-college tuition related) withdrawals, you must pay income tax and a 10% penalty on the earnings.
Any future college student, regardless of age, may benefit from a 529 Plan, including the person who opens the account. Each beneficiary needs a Social Security number or Tax ID. If the beneficiary receives a scholarship and doesn’t need the funds, then the amount in the account may be transferred to another qualifying family member or withdrawn without penalty. If the money is withdrawn, federal income tax applies to the earnings.
Any U.S. resident of any state who is at least the age of majority in that state (typically 18) may contribute to the account. Once the account is open, relatives or non-relatives have an opportunity to invest in the college education of the beneficiary. It’s common for grandparents to fund 529 Plans for grandchildren’s college expenses. Once every five years, an estate may contribute up to $70,000 for an individual or $140,000 for a married couple filing jointly.
Different types of plans are available, and it’s important to understand the details prior to opening the account.
Savings Plans – The money that you contribute into a savings plan is invested and will grow or decline based on the investment vehicle(s).
Prepaid Plans – Your contributions pre-pay the college education costs at the in-state public school or school system that you designate. Later, you may choose to convert a prepaid plan to use it for private or out-of-state colleges.
*Not all 529 Plans are the same, so you’ll want a full explanation in advance to be aware of any restrictions.
© 2017 Silverthorn Investments
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