Your Ultimate Guide to 529 College Savings Funds
The 529 college funds offer a flexible and tax-advantaged account created for saving for education. The saved cash can be used for various education expenses for any college around the country. The majority of states provide different types of 529 plans and each has its perks. Read on to find out what 529 college savings plan is and how it works.
What are the types of 529 college savings plans?
There are two most common types of 529 college funds, such as:
- Prepaid Tuition Plan. This plan allows you to pre-pay part of or all the expenses of an in-state public college education. It can also be used for out-of-state and private colleges. For instance, you can choose the private college 529 savings plan, which is sponsored by over 250 private colleges.
- College Savings Plan. This plan works like Roth IRA or Roth 401(k) and involves investing your after-tax is also known as non-retirement and contributions in a mutual fund or other similar funds. The 529 plan greatly depends on the investment options.
Which states do provide 529 college savings plans? What are the tax benefits?
Almost every state has its own 529 college savings plan and you can choose whatever you’d like or even opt for two plans. Before you choose your 529 plan, compare different state plans to find the best perks for you.
The federal tax law offers a range of tax benefits, including tax-free qualified distributions and 5-year gift tax averaging. There are states that provide the corporate tax incentives like tax credits for contributions to the 529 plan of a particular state and state income tax deductions.
How does 529 college savings fund works?
The 529 college savings plan is created to pay for qualified college or university expenses, such as includes fees, tuition, books, equipment, internet access, supplies, laptop or computer, and board and room at times. The Internal Revenue Service (IRS) lets tax-free withdrawals of over $10,000 annually, per beneficiary for tuition expenses at religious, public and private K-12 schools.
You can use this handy calculator to play around with how much you need to save and how much college will cost your kids. It is an excellent tool to plan your 529 college fund.
Can 529 plan funds be used for other purposes?
Since those saved funds are totally yours, you can use them for other purposes as well. But, the portion of earnings of a non-qualified distribution might be subject to a 10% tax penalty and typically income taxes, albeit there’s an exception.
Moreover, there are certain expenses that you think are critical, yet the IRS thinks otherwise. For instance, a standard 529 college saving plan doesn’t cover student loan payments, daily transportation costs, and a student’s health insurance.
How to use 529 college savings plan
Many 529 college savings plans let a payment distribution right to the school, the beneficiary, or the account holder. Other 529 plans let you pay right from your account to the third party like a landlord. Keep in mind that itâ€™s important to learn more about your plan and how to make payment distributions according to it. Depending on your terms, you might have to report any withdrawals from or contributions to your 529 college savings plan on the annual tax returns.
Your Ultimate Guide to 529 College Savings Funds Final Thoughts
With a 529 college savings plan, it’s easier to survive the college years. Before you open an account though, ensure you learn as more information about it as possible as each state offers its benefits. As with many financial journeys, it is better to start earlier than later but it is never too late. If you plan an open a 529 college fund for your child when they are young, you will ensure that they have a large amount of money to help cover the costs of college.