529 Plans: Funding the Future
Original Article found at: College Savings 101
A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary. You can use a 529 plan to pay for college, K-12 tuition, apprenticeship programs, and even student loan repayments. If using a 529 plan to save for college, your savings will have a minimal impact on financial aid eligibility.
Types of 529 PlansThere are many types of plans you can choose from in order to save for college but 529 plans are typically categorized as either prepaid tuition or college savings plans. Here is how each of these types of plans works:
• College savings plans: These plans work much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. The 529 college savings plan offers several investment options from which to choose. The 529 plan account will go up or down in value based on the performance of the investment options. You can see how each 529 plan’s investment options are performing by reviewing our quarterly 529 plan performance rankings. • Prepaid tuition plans: These plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges, sponsored by more than 250 private colleges.Educational institutions can offer a prepaid tuition plan but not a college savings plan. The first education savings plan was a prepaid tuition plan: the Michigan Education Trust (MET) was created in 1986.
More than a decade later, Section 529 was added to the Internal Revenue Code, authorizing tax-free status for qualified tuition programs. Today there are over 100 different 529 plans available to suit a variety of education savings needs. 529 Plan Tax BenefitsA 529 college savings plan works much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds, ETFs and other similar investments. Your investment grows on a tax-deferred basis and can be withdrawn tax-free if the money is used to pay for qualified higher education expenses. Contributions are not deductible from federal income taxes.
You may also qualify for a state tax benefit, depending on where you live. More than 30 states offer state income tax deductions and state tax credits for 529 plan contributions. These tax benefits make 529 plans better for college savings accounts than traditional savings or investment accounts.
Some families use 529 plans as an estate planning vehicle since contributions are considered completed gifts to the beneficiary. Up to $17,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion in 2023. For even more information on 529 Plans, please visit the original article found at: College Savings 101
• College savings plans: These plans work much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. The 529 college savings plan offers several investment options from which to choose. The 529 plan account will go up or down in value based on the performance of the investment options. You can see how each 529 plan’s investment options are performing by reviewing our quarterly 529 plan performance rankings. • Prepaid tuition plans: These plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges, sponsored by more than 250 private colleges.Educational institutions can offer a prepaid tuition plan but not a college savings plan. The first education savings plan was a prepaid tuition plan: the Michigan Education Trust (MET) was created in 1986.
More than a decade later, Section 529 was added to the Internal Revenue Code, authorizing tax-free status for qualified tuition programs. Today there are over 100 different 529 plans available to suit a variety of education savings needs. 529 Plan Tax BenefitsA 529 college savings plan works much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds, ETFs and other similar investments. Your investment grows on a tax-deferred basis and can be withdrawn tax-free if the money is used to pay for qualified higher education expenses. Contributions are not deductible from federal income taxes.
You may also qualify for a state tax benefit, depending on where you live. More than 30 states offer state income tax deductions and state tax credits for 529 plan contributions. These tax benefits make 529 plans better for college savings accounts than traditional savings or investment accounts.
Some families use 529 plans as an estate planning vehicle since contributions are considered completed gifts to the beneficiary. Up to $17,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion in 2023. For even more information on 529 Plans, please visit the original article found at: College Savings 101
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!