It is that time of year where high school graduates are preparing themselves for the next step in their academic career, college. The preparation for parents and grandparents undoubtedly started well before the summer after their senior year, especially when it comes to cost of tuition.
Parents and grandparents are often the first to help new children prepare for the high cost of college tuition by opening some sort of savings vehicle in their name. A popular choice as of late has been tax-advantaged state-run 529 plans. These savings plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
Out of state, in-state or private colleges do not play a factor in starting a 529 or choosing a state’s plan. You are more than welcome to use any state’s 529 plan. In fact, 34 states currently offer residents a full or partial tax deduction or credit for plan contributions. The contributor can make their decisions based on tax credits, fees, asset allocation or historical performance, and these decisions are usually determined with the advice of the contributor’s financial advisor.
A 529 plan offers many other benefits any family member can appreciate: For one, they can be assured the money they are giving their children will be used for its intended purpose. To avoid incurring income taxes and a 10% penalty on the earnings portion of the withdrawal savings in a 529 account must be spent on qualified education expenses such as:
– Books and supplies
– Technology Items
– Room and Board
Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so they will grow tax-free as long as you use withdrawals for eligible college expenses, such as those listed above. If one child does not use up all the funds you have provided, you can change the beneficiary to another child without any tax implications.
These 529 plans are a great way for a guardian to help out their children manage the high costs associated with college. To learn more about these and more college savings opportunities, visit us at midwest-wealth.com or call us at 317-288-4989.