College funding is a top priority for many parents, grandparents, and others. A smart investment like a 529 savings account can help build your assets to save more for your child’s college.
What is a 529 savings account?
529 accounts are named after the tax code that allows their use, section 529. A 529 account may also be referred to as a “Qualified Tuition Program” or QTP. But whatever name you call it, it is considered one of the best options for saving for college because it offers significant tax advantages.
Who is the ideal investor for a 529 savings account?
A 529 savings account is ideal for parents or grandparents who have some of the following characteristics:
- Want to save more than $2,000 a year.
- Earn enough money to be ineligible for a Coverdell ESA.
- Want the ability to reclaim assets for any reason they choose.
- Live in a state that offers a state income tax deduction for contributions to a 529 account.
- Have multiple children hoping to all attend college.
- Are starting to plan for college late in their children’s lives.
- Plan to save significant amounts of money for college expenses.
- Your children may attend advanced and costly study programs.
- Want to fund your child’s college while significantly reducing your own estate size.
Potential Advantages
529 accounts come with several advantages:
- Tax-deferred growth and tax-free withdrawals: As long as the money is used for qualified educational expenses for the beneficiary, you won’t have to pay taxes on the earnings.
- No income limits on contributors: Unlike other plans (like a Coverdell ESA), the IRS does not impose income restrictions on contributors.
- Effectively, no contribution limits: Contributions cannot be “more than the amount necessary to provide for the qualified education expenses of the beneficiary.”
- Control over the assets: Section 529 allows the parent or donor to retain control of the assets indefinitely. It even allows them to close the plan and withdraw their funds (as long as they pay taxes and penalties).
- State income tax deductions: Donors are eligible for tax deductions and some credits in 34 states and Washington, D.C.
- Up to $10,000 for qualified student loan repayments: Beneficiaries can apply up to $10,000 towards student loan repayment.
Potential Disadvantages
While there are fewer disadvantages of 529 accounts compared to the benefits, there are some drawbacks you should be aware of. The biggest may be that distributions from 529 accounts for pre-college expenses (K-12 grades) are limited to $10,000.
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Source: https://www.thebalancemoney.com/beginners-guide-to-section-529-savings-accounts-4060465
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