September – With schools reopening throughout the country there is never a better time than now to start with a college savings plan for your kids. Starting the savings habit early and wisely makes college a very realistic achievable goal.
The value of college education is immense, but the cost incurred in the process is enough to create a permanent hole in a family's savings purse. The numbers presented before us today are scary – with rising rates of inflation, the cost of higher education has spiraled, and today's kids may face college bills upward of $250,000. To help families save for rising college costs, states offer 529 college savings plans with tax benefits to enhance savings.
What are 529 college savings plans?
These state-sponsored plans are named after Section 529 of the Internal Revenue Code which gave states permission to offer savings plans exempt from federal taxation.
Each state determines what the lifetime contribution limit or account balance cap will be in its 529 plan, but typically such limits range between $100,000 and $270,000. Investment minimums are low (most plans allow saving as little as $25 a month as long as a minimum of $500 is accumulated within two years of the initial purchase date), and there is no restriction on the contributions every year unless the account is nearing the lifetime cap.
529 plans - good estate planning tools:
ü One may contribute as much as $65,000 tax-free per beneficiary in a single year without the gift being taxable, but that contribution will be treated as if it were being made in $13,000 installments over the next five years.
ü Married couples can contribute up to $130,000 per beneficiary in a single year
ü Ideal for parents, grandparents and friends to reduce size of their taxable estates today and help their cherished ones attend college in future
Most 529 savings plans offer a menu of age-based portfolios, and some also offer a small selection of stock and bond funds. Early on, the portfolio is tilted toward stocks, and as the time for college nears, the weighting shifts toward bonds.
If used for qualified higher education expenses such as college tuition, fees, books, room and board, investment earnings in a 529 plan are tax free. While the taxpayer's contribution is not deductible on his / her federal taxes, the investment will grow tax-deferred and withdrawals will not be subject to federal tax. In addition to federal tax breaks, one gets state-tax deductions on contributions or exemptions on qualified withdrawals.
Flexibility on offer:
One can choose any state's 529 plan regardless of the state of residence, where the beneficiary lives, or where the beneficiary will eventually attend college, and still be eligible to claim the associated federal tax benefits. Only a few states restrict participation to state residents. The money accrued in the savings account can be used to fund higher education at any eligible educational institution in the country.
Starting on savings while a child is still young helps take maximum benefit of compound earnings.
Why choose a 529 college savings plan?
ü Withdrawals for qualified education expenses exempt from federal taxation
ü Investment earnings grow tax-free
ü Can be opened by parents, relatives and friends
ü Beneficiary can be any age
ü No restrictions on income levels – anyone can contribute
ü Assets generally protected from creditors
ü Option to change account beneficiary