Section 529 plans are popular education savings vehicles. To choose the type of 529 plan that’s right for you, it’s important to understand how 529 savings plans and 529 prepaid tuition plans work and the differences between them.
Looking for a tax-advantaged college savings vehicle that has no age restrictions and no income phaseout limits — and one you can use to pay for more than just tuition? Consider 529 savings plans, a popular way to save for higher-education expenses. Named after the section of the tax code that authorized them, 529 plans (also known as qualified tuition plans) are now offered in almost every state. You may find that 529 plans make saving for college easier than before.
It’s tax time, and your kitchen table is littered with papers and forms. As if this isn’t bad enough, you recently paid your child’s college semester bill, and you don’t know where you’ll find the money to pay the taxes that you expect to owe. Well, you might finally catch a break. Now that your child is in college, you might qualify for one of two education tax credits — the American Opportunity credit and the Lifetime Learning credit. And because a tax credit is a dollar-for-dollar reduction against taxes owed, it’s more favorable than a tax deduction, which simply reduces the total income on which your tax is based.
When you contribute to a 529 plan, you’ll not only help your child, grandchild, or other loved one pay for school, but you’ll also remove money from your taxable estate. This will help you minimize your tax liability and preserve more of your estate for your loved ones after you die. So, if you’re thinking about contributing money to a 529 plan, it pays to understand the gift and estate tax rules.
529 plans can be powerful college savings tools, but you need to understand how your plan works before you can take full advantage of it. Among other things, this means becoming familiar with the finer points of contributions and withdrawals.
The income tax benefits offered by 529 plans make these plans attractive to parents (and others) who are saving for college or K-12 tuition. Qualified withdrawals from a 529 plan are tax free at the federal level, and some states also offer tax breaks to their residents. It’s important to evaluate the federal and state tax consequences of plan withdrawals and contributions before you invest in a 529 plan.
529 plans can be a great way to save for college, but they’re not the only way. When you’re investing for a major goal like education, it makes sense to be familiar with all of your options.
For National College Savings Month in September, we discuss several burning issues about these popular college savings vehicles.
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Armstrong Dixon is a private wealth management firm, founded in 2013 and headquartered in the Mt. Washington Village of Baltimore City, MD.
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