A 529 plan is a college savings plan that encourages saving while also offering financial aid and tax benefits. Also known as a qualified tuition plan, 529 plans can be a very smart way to put money aside for your children so that they are able to utilize it in the future. Additionally, 529 plans aren’t limited to college tuition; they can be used for K-12 tuition payments as well under the prepaid tuition plan. Here are some of the helpful benefits you’ll find if you open a 529 college savings plan.
One of the greatest benefits of a 529 plan is its ability to grow and increase federal tax-free. Unlike many other plans, money in a 529 plan is not taxed when it is withdrawn. The tax-free withdrawals reach up to $10,000 for a majority of educational endeavors (private, public, religious, etc.). Many other plans, such as mutual funds, require that people pay a portion of their earnings to taxes and are also subject to capital gains taxes. Therefore the benefit of having such money earmarked for educational purposes is second to none.
You Control the Account
As the controller of the account, you are the only one that has access to its funds and can make decisions about where they go. While the funds are to benefit your child (the beneficiary), it’s best that you have the ability to maintain control. This differs from other accounts, as some of them are similar but convert the funds over to the beneficiary at a certain age. It is also a handy backup plan in case any life circumstances come calling – although this will come with a penalty of 10% in addition to income tax.
State Tax Breaks
Along with the benefits of federal tax savings, at least 30 states offer additional tax deductions or credits for 529 plans. Each year that you contribute to your 529 you can claim those tax benefits; therefore you’ll want to continue to make deposits into the account until you reach the final tuition bill.
A 529 plan is an easy saving’s plan to maintain. Most plans require limited activity from the controller as they are often able to open an account, set the investment amount, and ultimately let it sit. The continued investment management of the account is often handled by an outside investment company or the state treasurer’s office. Therefore, it is to someone’s benefit to put everything in place and simply forget about it, as you can trust whoever is managing it to make the decisions.
Easy and flexible
A 529 does not have to be reported in taxes every year, making it so that no extra forms have to be filled out. On top of that, the options for the investment can be changed twice a year and can be rolled into another 529 plan if need be.