Also known as a qualified tuition program or QTP, a 529 plan is one of the most efficient ways to save for higher education offered today. The flexibility and unique benefits of 529 plans allow accountholders to cope with the rising costs of a college education, while remaining very much in control of their money.
In this article, we're going to talk about the benefits of 529 college savings plans. We're going to start that discussion with a brief overview of these programs. Next, we'll talk about the advantages these plans provide to families saving for college. Then we'll finish up with a discussion of contribution limits, income taxes, and withdrawals.
529 Plan Overview
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The 529 college savings plan is structured as a flexible, tax-advantaged, college savings program. The 529 offers investors the benefits of tax-deferred savings, estate planning features, and extremely high contribution limits. Unlike many other savings plans, a 529 has no income limits to restrict an individual's eligibility to contribute to a plan.
College costs continue to rise at a rapid pace. For those families that want to send a loved one to college someday, the benefits of these plans are hard to beat.
529 Advantages
Listed below are some of the many advantages that a 529 plan has to offer parent-investors:
Maximum contribution limits are relatively high, up to $140,000 in a given tax year and $300,000 per beneficiary.
Money in a 529 plan can grow on an income tax-free basis.
Account balances are often protected from bankruptcy proceedings.
Accountholders retain control of the assets in the plan, not the beneficiary.
Designated plan beneficiaries can be changed at any time.
Some states allow for tax-free withdrawals from 529 plans if they are used for expenses at a qualified higher education institution.
Money in the account can be used in over 800 foreign / overseas schools as well as over 8,000 schools located in the United States.
529 account balances can be used to pay for tuition, room and board, fees, books and any other supplies necessary for attending a class.
529 Plan Contribution Limits
Contribution limits may vary, depending on the plan chosen. However, it is possible to find 529 plans that allow investors to contribute over $300,000. Future contribution limits will vary based on the current costs of tuition at graduate and undergraduate schools.
Gift Tax Contributions
Contributions may also be eligible for the gift tax exclusion. In general, investors can contribute up to $15,000 ($30,000 for married couples in 2020) for each beneficiary in a single tax year without federal gift tax consequences. It's also possible to accelerate five years' worth of gifts by contributing up to $75,000 ($150,000 for married couples) in the first of a five-year period.
Tax-Deferred Earnings and Withdrawals
The earnings on a 529 plan's account grow on a tax-deferred basis, just like a Traditional IRA or a 401(k) plan. In addition, all earnings are exempt from federal income taxes if the money is used to pay for qualified higher education expenses.
Withdrawals can be made at any time from a 529 plan. However, those earnings that are not used to pay for qualifying education expenses will be taxed as ordinary income and subject to a 10% additional tax penalty.
Control of Funds
Another important benefit of a 529 plan is the accountholder remains in control of the funds. Unlike other types of accounts, such as those covered under the Uniform Gifts or Transfers to Minors Act, qualified withdrawals may only be used by the beneficiary to pay for higher education expenses. The beneficiary never takes control of the account.
Finally, the account owner can change the beneficiary of the plan to any other member of the former beneficiary's family without penalty, and at any time. This would include siblings, parents, and cousins of the beneficiary.
The 529 is clearly a flexible and effective way to start saving for college expenses; the benefits and advantages of this plan cannot be matched by any other college savings program.
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