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Save for College and Get Tax Benefits

Posted on August 1, 2012 by

529-college-savings-bankA 529 plan can provide a very easy hands-off way to save for future college costs. Once you decide which 529 plan to use, complete a simple enrollment form and make your contribution. You can also sign up to do automatic deposits from your back account. You can make deposits to the plan whenever you want based on what you can afford. It’s also a great alternative for family members, like grandparents, to give cash gifts by making donations to the account directly. Forgo the toys and get the college money saved up!

Federal tax benefits
529 plans offer unsurpassed income tax breaks. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free. The tax-free treatment was made permanent with the Pension Protection Act of 2006.

Q. Are there contribution limits?
A. Yes. Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $13,000 during the year.

Q. Are there different types of 529 plans?
A. Yes, there are two basic types: prepaid tuition plans and savings plans. And each state has its own plan. Each is somewhat unique. States are permitted to offer both types. A qualified education institution can only offer a prepaid tuition type 529 plan.

Q. Am I restricted to my own state’s 529 plan?
A. No. Your state’s 529 plan may offer incentives to win your business. But the market is competitive and you may find another plan you like more. Be sure to compare the various features of different plans.

Q. Who controls the funds in a 529 plan?
A. Whoever purchases the 529 plan is the custodian and controls the funds until they are withdrawn.

Q. Each 529 plan account has one designated beneficiary. What does that mean?
A. A designated beneficiary is usually the student or future student for whom the plan is intended to provide benefits. The beneficiary is generally not limited to attending schools in the state that sponsors their 529 plan. But to be sure, check with a plan before setting up an account.

Q. What is an eligible educational institution?
A. An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.

Refer to the IRS website for more details on the 529 plan and its benefits: http://www.irs.gov/newsroom/article/0,,id=213034,00.html

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