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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.

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