Benefits and Eligibility
529 college savings plans offer numerous advantages for parents, relatives, financial planners, and students intending to attend college. Although these accounts do not magically make funds appear to cover college expenses – you still need to save diligently over a long period – they make managing those funds easier and more efficient while providing some tax benefits.
Distributions
When opening a 529 college savings plan account, the parent or account holder must designate a beneficiary. This “designated beneficiary” is typically the student who will eventually attend college.
When distributions are made from the account to cover qualified education expenses for that beneficiary, there is no tax on the growth of the original investment. Qualified education expenses can include college tuition, fees, books, supplies, and equipment required by the educational institution for enrollment.
If any distributions from the account are not considered qualified, meaning the funds were spent on non-education-related items, federal income tax will be due on the distributed investment growth, and a 10% penalty may also apply.
Flexibility of Ownership
If the designated beneficiary does not go to college or if funds remain unused, the parent or account holder can change the beneficiary – to a brother, sister, or niece, for example. IRS rules are quite flexible and allow the beneficiary to be changed to any member of the immediate family, as well as to the descendants of the original beneficiary.
Impact on Financial Aid Eligibility
A 529 account is typically considered part of the parent’s assets, meaning that 5.6% of its value is expected to be used to cover college costs. This offers a significant advantage over UGMA/UTMA custodial accounts, which require 20% of assets to be used for college expenses.
Providers of 529 Plans
529 plans vary slightly by state, and many states use different investment managers to oversee the fund’s assets. Investment options are usually limited to the mutual funds offered in each unique plan. Although you can generally use any plan to attend college in any state, you should check if any state income tax-related benefits may apply to you.
Conclusion
529 college savings plans should be at the top of the list for parents and individuals looking to save for their loved ones’ education. Although there are some rules to follow, the tax benefits and flexibility of ownership of these plans make them worth the effort. Furthermore, you will ultimately feel gratified when you see the student you helped walk across that stage to receive their diploma at graduation.
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Sources:
– Congress.gov. “Public Law 104–188,” Page 110 STAT. 1895.
– Kansas.gov. “Kansas State Treasurer – Learning Quest Frequently Asked Questions,” Page 1.
– MOST—Missouri’s 529 Education Plan. “MOST 529 Tax Benefits.”
– CollegeInvest. “FAQs.”
– South Carolina Legislature. “South Carolina College Investment Program.”
– U.S. Securities and Exchange Commission. “An Introduction to 529 Plans.”
– United States House of Representatives. “26 USC 529: Qualified Tuition Programs.”
– IRS. “Publication 970, Tax Benefits for Education,” Page 61.
– Fidelity. “The ABCs of 529 Savings Plans.”
Source: https://www.thebalancemoney.com/basic-overview-of-section-529-college-savings-plans-795279
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