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Saving for Your Child's Education With a Section 529 Plan
Q. It's time for us to begin saving for our child's education. We've heard a great deal about Section 529 plans. What are the advantages?
A. The advantages can be significant. Section 529 plans include both prepaid tuition programs and college savings plans. While prepaid tuition programs have been around longer, it is the college savings plan that is garnering most of the attention these days. Changes enacted by the Economic Growth and Tax Relief Reconciliation Act made these college savings plans more attractive from a tax-strategy standpoint.
Basically, a college savings plan allows you to place money in a state plan to be used for the beneficiary's higher-education expenses at any college or university. These expenses include tuition, fees, books, supplies, and certain room-and-board costs. There is no tax deduction for contributions made to the plan, but the money is allowed to grow tax-free until the funds are withdrawn to pay for qualified education expenses. Your money is invested in stocks, bonds, or mutual fund options offered by the plan, with no guarantee as to how much will be available when the beneficiary enters college.
Here are some of the more significant benefits of these plans:
Private colleges and universities can now set up their own prepaid Section 529 plans. Distributions from these plans are eligible for the same federal income tax advantages as distributions from state-operated plans.
Most states now offer college savings plans, with the plans administered by the state or financial institutions. Certain state programs only accept residents, but most plans allow participants from any state. Before contributing to a plan, consider these tips:
College savings plans offered by each state differ significantly in features and benefits. The optimal choice for an individual investor depends on his/her objectives and circumstances. In comparing plans, an investor should consider each in terms of investment options, fees, and state tax implications.
Update: Beginning in 2018, a new law, the Tax Cuts and Jobs Act (TCJA) made it possible to use 529 accounts to pay for tuition not just at college, but also at public, private, or religious elementary or secondary schools. The TCJA also allows you to take tax-free distributions of up to $10,000 per year to pay for these education costs.
Mark Mirsky | 01/29/2019