Paying back student loans can be somewhat of a strain. Therefore, if you are just now beginning your own family, you can’t help but consider the many ways you can provide for their college education.
One of the popular ways to save for college is by making use of a 529 College Savings Plan. The state plan provides an advantageous way to save for higher education and is designed so the saver has more control of his or her money.
Types of 529 College Savings Accounts
A 529 college plan features regular savings and prepaid plans. Prepaid plans permit you to buy tuition credits that can be used when your child begins college.
529 College Savings Plans, on the other hand, are generally made up of mutual funds that influence income growth. Investments are altered periodically, with funds in the account becoming more conservative as the beneficiary gets older.
Money that is taken out of the plan for college costs is used for study supplies, such as books, pencils, and paper at accredited schools and colleges. Money from a 529 College Savings Plan can also be spent on student housing if the beneficiary is considered at least a part-time student. Savings from a 529 that is used for any expense other than college-related costs can be assessed a penalty for early distribution and be taxed.
Tax Benefits of 529 College Savings Accounts
Nevertheless, the benefits are substantial if you concentrate on saving for your children’s education. Even though the amount you contribute yourself cannot generally be deducted from your taxes, there are states that allow deductions on a portion or the entire amount you put into the plan.
Regardless, the principal is tax-deferred and any college expense that is paid with the savings in the plan is tax-exempt. What’s nice about a529 College Savings Plan is the latitude and authority you possess with respect to contributions.
The named beneficiary has no privileges in this regard. You can even make a distribution to yourself; although the part of earnings of the amount withdrawn will be assessed a penalty and be taxed for income tax purposes. The plan provides tax-exempt money for educational purposes provided that the money is used solely for that reason.
Other Benefits of 529 College Savings Plans
In addition, 529 College Savings Plans typically feature the ability to invest smaller contributions than other investments. Also, if your child opts to take another route other than college, you can transfer the money to another person in your family and not have to pay a penalty.
You can even shift the money in the account to yourself and use it for your own educational needs. If your child receives a scholarship, taxes, and penalties on 529 College Savings Plans can be waived or reduced on the account.
529 College Savings Plans are a great way to save for college education expenses. The tax benefits that parents can enjoy are tremendous. And, the ability to invest the funds in mutual funds allows the college funds to grow and benefit from compounding interest make the plans a great option for parents.