5 Reasons to start a 529 College Savings Plan
What is a 529 college savings plan? A 529 college savings plan is a state-sponsored, tax-advantaged investment vehicle that allows relatives and friends to invest in a child’s college education. How did it get this easy to remember name? The 529 college savings plan is based on a law created by the government called Section 529. The education savings plans are administered by certain investment companies and subject to contribution requirements and investment guidelines. The funds of the 529 plan can be invested in a portfolio of stocks, bonds, or mutual funds. Almost all states have their own 529 plans, I am not sure why they don't just have one plan but I guess the goverment likes to make it confusing. The funds can be used only for education withdrawals and if they are used non-educational purposes it triggers taxes and a 10% penalty, its still your money you just have to pay a penalty.
Five reasons to start a 529 college savings plan
- Tax advantages: The top reason for investing in a 529 plan is to allow the earnings to grow federal tax-deferred. When it comes time to paying for college the funds may be withdrawn federal tax-free. This is a pretty big deal, for example lets say you earned $2000 on year in growth on your investments in the 529 plan. If you nominal tax rate was around 25% you would have to pay $500 in taxes on the growth. With the 529 you end up having another $500 to keep growing for the future.
- Annual gift tax exclusion: Another advantage is the contribution limits are much higher and are not subject to the same limits as the the uniform gift to minors laws. Under the 529 plans, individuals can contribute up to $60,000 ($120,000 per couple) for tax year 2006 per beneficiary if contributor elects to recognize that gift in equal payments over five years for tax purposes and the contributor makes no other gifts to the beneficiary during that period.
- Keep control: You know I am sure you love your kid and when they are 5 you might think that they would never do anything wrong however, they are totally different people when they are 18. You need to keep control of the money to make sure little Jimmy or Sally doesn't decide he/she needs a new BMW for their 19th birthday. With the 529 plan the donor keeps control of the money – it is not irrevocably given to the child
- Things can change: Suppose you are saving for Little Sally again and she doesn't need the BMW or the savings that you built up for her for college because she pegs the SAT, has all A's and gets a full ride to Stanford. Guess what you are in luck. The 529 plan donor can change beneficiaries and you can allocate that money to Little Jimmy in stead.
- You get a state tax deduction: For example if you live in Michigan. You may also be eligible for a Michigan income tax deduction. The amount contributed by a Michigan taxpayer to MESP accounts during a tax year, less the amount of any qualified withdrawals from those accounts during that tax year, is deductible from Michigan adjusted gross income in an amount not to exceed $5,000 for a single return or $10,000 for a joint return for that tax year.
Related reading: Check out the following books if you are interested in learning more about 529 savings programs. The Best Way to Save for College 2007: A Complete Guide to 529 Plans or The 529 College Savings Plan Made Simple
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