529 plan
A tax-free way of saving money for college studies by families is a 529 plan.It is a state operated investment plan.This plan was authorized by the congress in 1996.The plan is officially known as qualified tuition programs (QTPs).This is the best plan to save by families for their childs college studies.These plans offer great tax breaks.The 529 plans differ from state to state.They are all exempt from federal income tax.The exemption from federal tax gives a wider scope for savings under this plan.
Investment in a 529 College Savings Plan helps to save for tomorrows tuition.The plan is operated by a state or an educational institution. It is so designed so that the plan comes as a help to the families to educate their children. The two basic programs under this plan are the prepaid programs and the savings programs.
College savings plans are utilized by parents who can use the plan funds to meet college expenses at any college. Whereas prepaid tuition plans allows the locking in for the future tuition at present prices.
Two basic 529 plan programs:
Students who wish to study in the universities within the state make use of the prepaid programs. Under this savings program the student gets the full value of his account. The amount can be used to pay tuition fees at any accredited college or university which is within the country. This plan has to satisfy a few basic requirements. Tax benefits are provided by federal tax law to the plan participant. Whereas under the prepaid tuition programthe full value of the account cannot be utilized by the student. The value of savings that can be withdrawn depends on the state. But one advantage under the prepaid program is that the student can go in for private or out of the state colleges. Every state now has a 529 Plan. It is up to the individual State to decide how the 529 Plan should operate.
Concepts of 529 plan:
- Earnings of a 529 plan are exempt from federal taxes.Even the withdrawals are also exempt from taxes. The only condition being that the money has to be utilized to meet the college expenses.
- Residents by some states are allowed to waive state tax under this plan. Whereas some other states allow deductions on the contributions made towards the plan.
- 529 plans have large maximum contribution limits. The limit may in some cases be as high as $250,000 per beneficiary.
- Investment companies are hired by states to manage their 529 plan accounts.
- A 10% penalty with the addition of federal income tax will be charged on the earnings in cases where the funds are withdrawn for purposes other than education. The states are at liberty to fix the penalty.
- 529 contributions made by grandparents are regarded as completed gifts and are excluded from the estate. Switching of beneficiaries to other grandchildren by their grandparents is allowed by the state.
Advantages of a 529 plan:
- First, there is an unsurpassed income tax breaks.Although the contributions are not deductible from the federal tax return, but the investment grows tax-deferred. hen payment is made for the beneficiary\'s college costs the savings can be withdrawn federally tax-free. Different states may offer some tax breaks as well which is in addition to the federal treatment.
- Second, the donor is in control of the account. But for a few exclusions, the person named as the beneficiary has no rights to the funds. The person who invests can only decide when withdrawals are taken and for what purpose.
- Third, a 529 plan provides a very easy way to save for college. Once the decision as to which 529 plan is to be used is made a simple enrollment form has to be filled and contributions can then be made.
- Finally, everyone is eligible to take advantage of a 529 plan.The amounts put in are substantial and in some state plans they are over $300,000 per beneficiary. Normally there are no income limitations or age restrictions. Second the donor is in control of the account.But for a few exclusions, the person named as the beneficiary has no rights to the funds. The person who invests can only decide when withdrawals are taken and for what purpose.
Tips on savings made under the 529 plan:-
Savings can be planned for gift exemption :
An investment of $60,000 a year is regarded as five adequate yearly gifts made to the beneficiary. So if the accountholder does not make any other gifts to the beneficiary in these five years, then the amount so invested in the 529 plan will be free from gift tax. The additional benefit to the accountholder is that the total gift exemption towards the child will not decrease.
Saving withdrawal penalties can be planned: Withdrawal penalties are imposed when the funds from the investment is utilized for purposes other than paying tuition fee of the beneficiary. Such withdrawals are known as unqualified and it attracts income tax and a 10% penalty on the amount so withdrawn.
Tax savings can also be planned for: The most important benefit is that the accountholder of 529 state plan can channelise the welfares of the plan to their own accounts or to the accounts of the beneficiaries or even directly to some educational institution.
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