Qualified Withdrawals Are Tax Free
Withdrawals from a 529 plan that are used to pay qualified higher education expenses are completely free from federal income tax and may also be exempt from state income tax. Qualified higher education expenses generally include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an “eligible” educational institution. In addition, the definition includes a limited amount of room-and-board expenses for students attending college on at least a half-time basis. The definition does not currently include the cost of transportation or personal expenses.
Note: A 529 plan must have a way to make sure that a withdrawal is really used for qualified education expenses. Many plans require that the college be paid directly for education expenses others will prepay or reimburse the beneficiary for such expenses .
How Much Should You Have In A 529 Plan By Age
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The 529 College Savings Plan is one of the best ways to save for college. But most people aren’t taking full advantage of them. And I’m not going to lie – I’m one of them.
So let’s dive in and see how much you should have in a 529 plan.
Recommendations To Help Save For College
Even saving just $100 per month can seem like daunting task. I know it is for me. However, when it comes to saving for college, here are some simple tricks that can help:
1. Save all of your child’s birthday and holiday money. In many families, kids receive money from their grandparents, aunts, uncles, and more. I would estimate that the average kid receives at least $200 per year in gift money. If you saved that, you’re 20% of the way to fulfilling their annual 529 contribution.
A great way to do this is to use a service like College Backer.
2. Look at Upromise. This is a free service that is designed to help families pay for college by simply doing their normal shopping. Upromise offers cash back rewards for linking a credit or debit card and using that card at participating retailers. You can earn anywhere from 1% to 25% back at different retailers. Upromise says that some members are earning at least $1,000 per year – that’s almost everything you need to fully fund a 529 plan. Plus, right now you can get a $25 bonus if you link your 529 plan within 30 days of signing up! UPromise is easy to sign up and save for college – check it out here.
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Picking A 529 Plan Before A Child Is Born
If you already know which type of 529 plan youre looking for, youre ready to start weighing the many options available to you. Each state has its own plan some have several so its easy to be overwhelmed by your options. However, some 529 plans have historically performed much better than others the following are some of the top choices for opening a 529 plan before a child is born.
Ohios CollegeAdvantage 529 Plan
Introduction To 529 Plans
A 529 plan is a tax-advantaged savings plan in the US sponsored by states, state agencies, or educational institutions. In the US, contributions to 529 plans are after-tax , and the earnings within the plans are not included in US federal gross income provided the contributions and earnings are used for qualified higher education purposes.
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Us Citizens With 529 Plans Living In Canada
The foundation of every state is the education of its youth. Diogenes
Although taxes are higher and winters are colder, Canada has many qualities that attract more and more US citizens and their families north of the 49th parallel stricter gun laws and free health care, to name two. However, one challenge young families face when they move from the US to Canada is what to do with their education savings plans.
Contribute To Or Open Another Educational Savings Account
While a 529 plan tends to be the best option for many college students, there are also Coverdell Education Savings Accounts and custodial accounts, such as a UGMA or a UTMA .
Custodial accounts can be used for non-education purposes, which can give you a bit more flexibility if you’re opening one on the student’s behalf. But if there’s already an account in place, it may be better to contribute to that one instead of opening a separate 529 plan or other account.
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Ways You Can Give The Gift Of College Savings
If you have a grandchild, other relative or friend you’d like to give the gift of college savings to, you may wonder how to go about it. There are a few different options available, depending on what you’re comfortable with and what the prospective student already has in place.
Before you simply write a check, consider the following options.
Federal And State Tax Deduction Rules For 529 Plans
The federal tax deduction rules for 529 plans are straightforward. Unfortunately, the federal government does not allow families to deduct contributions to a 529 plan. There is no indication that this rule will change anytime soon.
Families should note that while the federal government does not reward 529 contributions, it does penalize early withdrawals. Families can make 529 withdrawals in any amount without penalty as long as the withdrawal is used for qualified educational expenses. However, families will pay a 10% penalty for any withdrawals made for noneducational purposes.
While federal tax rules do not allow families to deduct 529 contributions, states have their own policies. Remember that each 529 plan is owned and operated by a state government. Therefore, many states allow families to deduct 529 contributions on their state taxes.
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How Much You Can Contribute To A 529 Plan
Each state will set its own limit for how much in total can be put away in a 529 plan. However, there are no annual contribution limits set by the IRS.
Also, the federal government allows single individuals to contribute as much as $14,000 per year or $70,000 for five years and avoid gift tax consequences.
However, contributing to your own 529 plan isnt considered a gift and you can contribute as much or as little as you want. Plans like ScholarShare allow for automatic contributions, which can make it easy to save a little each month until you achieve your goal.
Who May Want To Consider A 529
Anyone with children or grandchildren likely going to college, whether they are babies or teenagers, may want to consider investing in a 529 savings plan account. The sooner you start, the longer you have to take advantage of the tax-deferred growth and generous contribution limits.
Investors also may want to consider setting up regular, automatic contributions to take advantage of dollar cost averaginga strategy that can lower the average price you pay for fund units over time and can help mitigate the risk of market volatility. Besides, many investors don’t have the financial capacity to make meaningful, lump sum contributions to a 529 college savings plan.
“It cannot be stressed enough that asset allocation cannot solve poor savings behavior,” Zakian says. “Regular, disciplined saving is the most important factor in growing the amount you put away for college.”
Being smart about the way you save for college also means being mindful of your other financial priorities. “Fidelity believes that retirement saving should be a priority, because while you can’t borrow money to pay for retirement, you can for college,” Durkan says. Still, if college saving is among your financial goals, choosing to invest in a 529 savings plan may be one of the most educated decisions you can make to help pay for qualified college costs.
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Can I Continue To Save In A 529 Plan While My Child Is In College
Youve taken your first withdrawal to pay for your loved ones college expenses. But can you still make contributions into your account now that youre actively using it? Yes! Even if your student is enrolled in a two-year, four-year, graduate, vocational or professional school, you can still save in a 529 plan. The tax benefits, after all, are still available to your Invest529® or CollegeAmerica® account.
How To Choose College Savings Plans For American Expats Living Abroad
As with as with any investment plan, it is essential to review three most important criteria.
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What Are The Disadvantages Of 529 Plan
Here are five potential disadvantages of 529 plans that might affect your savings choice.
- There are significant upfront costs.
- Your childs need-based aid could be reduced.
- There are penalties for noneducational withdrawals.
- There are also penalties for ill-timed withdrawals.
- You have less say over your investments.
How Much Can An American Expat Contribute To The 529 Education Savings Account Per Year
Each US taxpayer can contribute up to $14,000 per year per child in 2013. The contribution up to $14,000 qualifies for the annual gift tax exclusion so there is no gift tax return filing requirement. American expats can choose to make a lump sum contribution of up to $70,000 and spread this amount over 5 years to avoid federal gift tax. The advantage of making a lump-sum contribution is a tax-free growth of investment. Consequently, it is better to invest a larger amount as early as possible to generate a higher return.
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Its All In The Compounding Of The Interest
If you can swing it financially, it makes sense to front-load your 529 plan, also known as a qualified tuition plan . The purpose of a 529 plan is to pay future education costs, typically for a child or grandchild. Before the passage of the Tax Cuts and Jobs Act of 2017 , 529s could be used only for college costs. Now they can be used for privateK-12 education costs as well.
Front-loading the plan allows earnings to be compounded on more money over a longer time period. In other words, the more you put in initially, the longer that money has to grow, and the greater the balance when the funds are used, especially if you are not going to need them until college.
Tax Benefits Plus What To Watch Out For
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For many, college is one of the best times of a persons life but it can also be extremely expensive, and that bill could last a lifetime.
If you expect to be footing at least part of the cost, education planning is crucial to reducing or avoiding the hard hit to your wallet when the tuition bill comes. A 529 plan is one smart way to save, invest and pay for those expenses in a tax-advantageous way.
This is what you need to know and the pitfalls to avoid.
There are two major types of 529 plans, both of which are offered by state governments: a prepaid plan, where the investor picks a specific school before funding the account , and an education savings plan, where money is invested immediately and there are few limits on what school is eventually chosen.
The pros and cons of prepaying college tuition
Prepaid plans can sound like a great idea if youre worried about ever-rising tuition bills. But fewer and fewer states still offer them, and the plans that survive are very restrictive. Admission to that school isnt guaranteed, of course, and if a student opts to study elsewhere, the person who set up the plan can lose money. Any earnings that are distributed for non-qualified reasons, like those not put toward tuition, are taxed and incur a 10% penalty.
Keep in mind though: Only nine states offer prepaid 529 plans as of now, and the beneficiary is restricted to using the money for tuition at an in-state college. Basically, read the fine print.
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What Happens If The Beneficiary Does Not Want To Continue His Or Her Education
In this situation, you have a couple of options. You can stay invested in case he or she decides to attend school laterthere is no age limit on using the money. Or you can change the beneficiary to an eligible family member of the original beneficiary.
You can also withdraw the money for other uses. However, a 10% penalty tax on earnings may apply if you withdraw the money to pay for nonqualified expenses.
It Could Hurt Your Childs Chances Of Getting Financial Aid
If someone else is thinking about opening a 529 plan for your child a grandparent or family friend, for example you may want to encourage them to pursue a different route.
Any distributions from a 529 plan thats owned by a third-party are counted as untaxed income, and they may hurt your childs chances of qualifying for financial aid, including grants, work-study programs, and subsidized loans.
It is possible to time the distribution from a 529 so that it doesnt count on your childs Federal Student Aid application, but you should make sure the person opening the account fully understands the steps required to do so before you give them the green light.
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Can You Open A 529 Plan Before A Child Is Born
If you or a loved one is planning to have a child in the near future or even in the distant future you might have already started thinking about how to fund that childs education. Given the astronomical price tag on college tuition these days, its no surprise, especially considering the rate at which those tuition prices are climbing.
Because 529 plans carry a wealth of benefits that can make higher education more affordable, theyre an attractive option for families from every walk of life, but can you open one for a child who hasnt even been born? The technical answer to this question is no, you cant in practice, however, the response is more like, Yeah, sort of.
Anytime you open a 529 plan for someone, you have to name a living beneficiary, which is typically the person who will be using the funds on their education. Of course, if that person has not yet been born, you cant exactly put their contact info on the form for a 529 plan, but theres an easy workaround that makes this limitation essentially moot.
All you have to do is to open the 529 plan that will eventually benefit the child in your own name or in the name of one of the childs close relatives appropriate options include a sibling, aunt, uncle, first cousin, parent, or grandparent . Once youve done so, set up the plan with the eventual recipient the unborn child in mind, meaning that you should select long-term investment options, make contributions as you can, etc.
What Are The Benefits
In addition to not having to pay federal income taxes on your contributions to these programs, there are many reasons to participate in these programs.
529 plans may not be included as assets on the Free Application for Federal Student Aid if owned by the grandparent of the student, which helps students qualify for financial aid. Any student or parental owned 529 assets greater than the asset protection allowance may reduce aid by 5.64%. Additionally, you can change the beneficiary on 529 plans, allowing you to use assets for siblings or other qualifying family members if the original beneficiary doesn’t go to college, use all the funds, or gets a scholarship.
Some states offer tax breaks, or partial tax breaks, in addition to those offered on the federal level, helping you stretch your earnings that much further.
Using these programs also makes it easier to report your taxes. You dont have to report your contributions to these programs on your federal taxes.
You can also change your investment options twice a year at no extra charge as your needs change and your investments rise and fall.
Anyone can take advantage of these programs, regardless of their age or income. A family member can easily contribute to this account as well. However, these plans come with lifetime contribution caps, which usually range from $235,000 – $520,000.
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