|
Section 529 College Savings Plans
Looking to save money for your child's higher
education? Section 529 college savings plans
(named after a section of the Internal Revenue
Code) can be an excellent tax-advantaged
way.
You should consult your tax advisor
to see
how a 529 plan applies to you,
but here are
some of the general characteristics:
- Investments grow tax-deferred and no federal
taxes are due on withdrawals to pay higher
education costs (some states offer tax credits
on contributions).
- Anyone (relative or not) can open an account
on behalf of a particular student. If multiple
friends and relatives each wish to support
a student's higher education, they each will
have to set up a college savings account
of their own, with the same child named as
the beneficiary on each account. Every state,
plus the District of Columbia has a college
savings plan of its own. It is perfectly
legal for you to invest in any of these,
regardless of your home state, although some
states offer special benefits to residents
or students who choose to attend a college
within their state.
- Funding a 529 plan might be a means to reduce
your taxable estate. However,
federal gift
tax rules still apply.
- The annual limit on the gifts from one person
to another before incurring gift taxes is
$11,000. Contributions to a college savings
plan count against this limit, including
contributions by parents (the limit is $22,000
for married couples).
- A special provision in the federal tax code
for 529 plans: an individual can place $55,000
in a college savings plan during a single
year and escape the gift tax as long as he
or she makes no other gifts to that same
student over the next 5 years.
- Some plans must be open for a given period
before withdrawals can be made
without penalty.
- Some plans cap the total contributions that
can be made for a given student. Also, be
careful not to set aside much more for a
given individual than reasonably can be expected
to fund his or her higher education. Tax
penalties may ensue.
|
|
|
