With the cost of college tuition constantly rising, it can be daunting to think about sending yourself or your children through several years of college. This is where 529 plans come into play. They can be a great way to prepare for college tuition and have some tax benefits that come with them as well. Mark Dicus & Company is here to talk about some of the benefits that come when you decide to open up a 529 plan.
Types of 529 Plans
There are two different types of 529 plans that you can choose from.
– 529 College Savings Plan: This is money that can grow tax free and is only allowed to be withdrawn to pay for tuition, college housing and textbooks or computers.
– 529 Prepaid Plans: This plan allows you to prepay a portion of in-state public college tuition. It locks in the cost at the time of the payment.
Tax Benefits of 529 Plans
When it comes to 529 plans, is most states, this invested money for college will grow tax deferred. When you withdraw it for qualified purposes it is federal tax free and state tax exempt. Of the 50 states in our country, 34 of them offer tax deductions or credits on contributions to 529 plans.
Can You Use a 529 Plan Out of State
While you are more than welcome to choose a 529 plan for a different state, you may find that the incentives for your state may win you over. Ever state is different, but there are some states that offer a state tax credit of up to 20%, up to 1,000 if you contribute $5,000 to their 529 plan. It is worth looking into your state and what they have to offer you.
529 Plan Withdrawals Not for Education
If you withdraw money from your 529 plan, you are required to use it for educational purposes. Not only that, but the expense has to be a qualifying one. If you fail to do this, you can see income tax implications as well as a 10% federal tax penalty on earnings. If you are withdrawing money, make sure you are using it for qualifying expenses.
Can the Owner of a 529 Plan Also Be the Beneficiary?
If you pay U.S. taxes, you are able to open a 529 plan for any U.S. citizen or resident alien as well as yourself. You will not run into any income restrictions and there is no certain number of 529 accounts that you can set up. Whoever sets up the account has control over the funds until they are withdrawn. You can change the name of the beneficiary if you decide you want the money to go somewhere else in the future.