529 Savings PlanPersonal Finance
A 529 plan is one of several variations used for saving money for a higher education. 529 plans are similar to many Roth retirement funds. You deposit after-tax contributions which are placed in investments. They are withdrawn tax-free, as long as the funds are being sent to an accredited college or university for specific expenses. These expenses include tuition, books, school supplies, and required enrollment equipment. You are responsible for proving expenses are being used for tuition.
529 Plan Benefits
The key benefit is that you pay no taxes if funds are used for higher education. If you save for their university costs without this program, the chances are high you’d pay taxes on the capital gains of your earnings. If you use a 529 plan you don’t pay capital gains taxation. If you start when they’re born and save until they’re ready for college, you would avoid substantial taxation on investment earnings. Additionally, when you changed investments within your program you would lose nothing to capital gains taxes.
529 Plan Sponsors
Your state must offer a 529 plan in order for you to participate. Essentially all states offer these plans as of 2013. There are normally multiple plans offered per state, each one provided by a different financial firm. This allows you to choose plans which specifically appeal to you. If you desire, you can choose out of state plans. There is a benefit to an in-state plan: they are usually exempt from state taxes. This benefit may be revoked if you select a plan which operates outside of your own residential area. Obviously, avoiding taxes reduces outflows and allows you to build college savings faster.
Expanding your 529 comparisons nationwide will increase the amount of options you have. Several factors change across state lines. The first change is the investment firm servicing your plan. States choose specific service providers for plans. The investment options, expenses, and fees also change with plan selection. These fees may not be obviously disclosed, but hidden in fine print or titled misleadingly. If you encounter this issue, choose another 529 plan. You need to know costs clearly since they reduce your compounding and slow university savings. If you don’t like the plan providers or options you have access to, you will need to invest in a 529 plan across state lines. The limitations and expenses also change. If you invest outside of your state, you may lose any state tax exclusions you’ve gained.
There are other benefits to having additional accounts across state lines. If you contribute the maximum amount of funds in one plan you can use another state’s plan to build further college savings. This allows you to consistently contribute the maximum amount to their plan repeatedly. There is no income limit to 529 plans; any income bracket can contribute.
Gifting and Gift Tax
These plans are wide open in other ways other than income. As long as the contributor has the social security number, they can donate to the 529 plan of a beneficiary. This is considered a gift under federal law, and is subject to the “gift tax”. In 2013, your contribution can be up to $14,000 per contributor without triggering the gift tax. The gift tax is up to 35%. The actual contribution resets annually. If contributing over $14,000 to a 529 plan, divide the contribution in half and pay before New Year’s Day. Then contribute again after the New Year begins. Spacing out your donations helps avoid gift tax.
You can also avoid the gift tax with a massive lump sum payment. A person can contribute up to $70,000 in a single year to the plan, but they cannot donate any funds to the plan until 5 years afterward. You won’t incur gift taxes if you don’t contribute additional funds until the time limit ends. This is beneficial in other ways as well: Your lump sum contribution gets more time to compound earnings if deposited at once. If you deposit $14,000 one year at a time for five years, your total compounded earnings after year 5 will be less than depositing the money at once.
The 529 plan has varying financial options. Your 529 plan will have normal mutual fund options with varying degrees of risk and return aggressiveness or conservatism. There are also mixed or evolving funds. These funds adjust risk and reward over time. The aggressiveness of a plan’s growth is directly correlated to the age of the child. The plan should be more aggressive when your child is young. As the child ages, the 529 plan shifts into conservative investments. When the child is extremely close to university age, the plan should become perfectly conservative, aimed at preserving funds instead of growing them.
529s & Financial Aid
Finally, you should be aware of the impact a 529 plan has on financial aid. A 529 plan created by parents is registered as an asset under their name. The same applies to plans registered by aunts, uncles, grandparents, or other family members benefitting a single child. The plan has a reduced impact on the total expected family contribution when owned by family members other than the student. As a result, your eligibility for financial aid is reduced by a lower amount with a 529 plan than it would be outside of the plan.
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