College Planning Using 529 Plans

The time of year has arrived for graduation season…graduating from college, high school, middle school and yes even preschool are times of celebration. It is a time to reflect on all of the achievements of your child and how time seems to have flown by.

The amount of preparation that has occurred is plentiful and this preparation is not only in the hours spent but in financial decisions that were made. Many parents are aware of the need to save for your child’s education, especially with the tuition costs increasing each year, but are unaware of one of the best ways to save: the 529 Plan.

Like many government run programs, they name the benefit from the tax code section where it is found. Marketing geniuses they are not. So the 529 Plan is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996.

They can be used to meet costs of qualified colleges nationwide. In most plans, your choice of school is not affected by the state where your 529 savings plan is invested. For example, you can be a CA resident, invest in a VT plan and send your student to college in NC.

Nearly every state now has at least one 529 plan available. It’s up to each state to decide whether it will offer a 529 plan (possibly more than one) and what it will look like, meaning 529 plans can differ from state to state. You should research the features and benefits of your plan before you invest and always explore your own state plan as additional tax savings may be available. You can go to www.savingforcollege.com to compare the benefits and comparison of each state’s plan.

There are certain benefits that 529 plans offer in regard to taxes. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free. The tax-free treatment was made permanent with the Pension Protection Act of 2006.

Your own state may offer some tax breaks as well (like an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment. There also may be a benefit to investing in your own state’s 529 plans (depending on which state you live in). If you don’t get any benefits from your state, you have the pick of every 529 plan that’s available…so it is best to compare each state’s plan.

A 529 plan can provide a very easy hands-off way to save for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer’s office or by an outside investment company hired as the program manager.

Earlier this month, legislation advanced in a key Senate committee that if passed (and it appears likely) would simplify the process with the hope that more Americans would take advantage of the tax breaks available with this program. One of the common sense changes would allow the tax-free savings accounts to be used to cover the cost of computers.

Everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $300,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions. So, start planning for the next graduation that you will be celebrating with your preschooler!

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About Maureen Crimmins

Maureen Crimmins is co-founder of Crimmins Wealth Management and a fee-only independent financial advisor. Have a financial question? ASK MAUREEN

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