Are you saving for your child’s college education? It can be tricky to figure out the best way to save, especially when you’re already dealing with all the other expenses. An excellent way to save for college is with a 529 plan.

What is a 529 plan?

529 plans are tax-advantaged savings plans specifically designed to help parents save for their children’s college education. 529 plans come in both taxable and tax-free versions, and there are significant benefits to using a 529 plan to save for college. For example, contributions to a 529 plan grow tax-deferred, and withdrawals used for qualified higher education expenses are exempt from federal income taxes. So if you’re looking for a way to save for your child’s future education costs, a 529 plan is definitely worth considering.

A 529 plan is a tax-advantaged investment account that can be used to save for future college expenses. There are two types of 529 plans: a college savings plan and a prepaid tuition plan.

College Savings Plan

A College Savings Plan lets you save money, which is invested within the state’s 529 program. You control how your investments are managed. The earnings from these investments increase tax deferred until they are withdrawn if the funds will be used to pay for an eligible expense at an eligible institution – such as tuition, room and board, computers, books, software required by the school etc. For example, the Virginia CollegeAmerica 529 savings plan states that any fees or charges imposed by an educational institution must be included in qualified higher education expenses for purposes of a 529 plan.

Prepaid Tuition Plan

A prepaid tuition plan lets you purchase units or credits at a participating college at current prices for future use—units are measured in terms of tuition credit hours, and the price is predetermined by state law. This option gives your child peace of mind because you know how much money will be needed to pay for future years of college, and it also provides long-term tax benefits. You can buy as little as $25 worth of tuition per semester hour (at current rates). The downside: Prepaid plans may not be available in all states and fees and expenses can be high.

529 plan basics:

-Anyone can open a 529 account as long as they are a U.S citizen or legal resident, including minors who would one day like to go to college themselves. Parents, grandparents, relatives, and friends can all contribute – giving the maximum annual contribution limit per year is pretty much up to the person setting up the account.

-A 529 account is a tax free savings account for future education expenses at colleges and universities throughout the United States and abroad for tuition, fees, books & supplies, etc. The earnings grow federal income tax deferred until withdrawal.

-You can withdraw the money at any time for any reason without federal tax or penalty.

-529 plans are college savings plans – they will not affect your child’s financial aid eligibility. Any funds used to pay qualified education expenses (tuition, fees, books, and supplies) during a particular tax year reduces the amount of financial aid that child is eligible for in future years. However: ‘There is an exception: Distributions used to purchase a computer and related equipment and services aren’t counted as part of the student’s assets on the Free Application for Federal Student Aid (FAFSA).’

-The person setting up an account does not need to be a parent or legal guardian of the child who will benefit from the 529 plan.

More information about 529 plans are available here.



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