Monday, April 6, 2009

529 Plans-The Cadillac of College Savings

By Steven Muller

529 plans get their name from the Internal Revenue Code section under which they were created. It is a plan that lets families invest and save for there child’s education costs. Your contributions to a 529 plan are not deductible, but the money invested in the plan accumulates tax-free. Even better, when you withdraw account funds to pay for qualified education costs, those distributions are also not taxed.

Another side of 529s is that they are set up by an adult who names the child as the beneficiary. Anyone can contribute to a 529 plan, such as the beneficiary child's aunts and uncles. It’s because the money is not in the youth's name and that won't hurt on college financial aid applications. If you want to make sure that parental ownership of the account also doesn't cause any financial aid problems, consider letting another relative, like a grandparent, set up the plan.

As with all invest plans there are things to consider that may persuade you not to get a 529 plan. One of which would be the complexity of these plans. They are not federally regulated so from state to state there are different rules and limitations. Not only that, but also there is a common practice of penalizing individuals for withdrawing these funds early and for a non-educational purpose than you can be taxed as much as 20%. However despite these drawbacks, a 529 plan for college saving has become the most popular way for families to save for college. It is an option that all should consider.


No comments:

Post a Comment