A qualified tuition program, also known as section 529 plans, is an impressive way to prepare to take care of your college finances.
What is a Qualified Tuition Program?
A qualified tuition program, also known as Section 529, is a program in which parents can prepay a student's college tuition fee or contribute to a savings account targeted at the kids' education. On the federal level, such contributions are not tax-deductible; and will be tax-free provided the funds were used for the payment of the education expenses of the proposed kids. There are states that offer extra tax breaks, allowing parents to contribute as much as $10,000 for 529 contributions for each kid per year.
While expenses incurred for homeschooling do not qualify, one can pay up to $10,000 each year for the tuition of the private, secondary public, elementary or religious institutions using 529 plan deductions.
Section 529 Plans: What Expense Can it Serve?
Section 529 plans come in two types – the education savings plan and the prepaid tuition plan. One can only use the prepaid tuition plan for qualified fees and tuition. This is a state-sponsored plan, and the funds will be locked in the kid's tuition and fees for an attendance that will be in the future even though the price will be set at what is available currently.
As an education savings plan, the second plan can be used for things like:
Fees and tuition
Graduate schools
Board and rooms including food and housing plan
Tuition fees for kindergarten up to age 12 – amount up to $10,000
Internet access, PCs and their accessories like printer, monitor, etc
Textbooks, lab accessories, and other important class and education items
Who can contribute to 529 Plans?
The following can contribute to the plan:
The Parents
The Grandparents
Other relatives
The beneficiary themselves
Friends
Is there any Annual Contribution Limit for Section 529 Plan?
There is a limit on the contribution amount to the amount that is important to take care of the kid's qualified educational expenses. For the year 2020, the same as 2019 and 2018, the sum of gifts up to $15,000 for each donor will qualify. Anyhe contribution above that will require that the individual pay tax on the gift for the year.
Coverdell Education Savings Account and Section 529 Plan: How do they Differ?
The distinct difference between a Coverdell account and a 529 plan is the beneficiaries' age limits. A beneficiary can only use the money in a Coverdell account when they get to age 30. 529 plans, on the other hand, have no age limit.
Also, there is the provision for the custodian of the account to set up a new beneficiary without incurring any tax obligation.
The tax reform allows both 529 plans and a Coverdell account for K-12 education, college, and Universities.
There is an annual contribution limit of 2000 USD for each kid on the Coverdell account. A 529 plan, on the other hand, has no limit as the state is in charge of the total amount one can contribute.
While a single individual can benefit from various Coverdell accounts, the contribution limit remains $2,000 per year. Similarly, a single individual can benefit from multiple 529 plan accounts, and there is no limit except the one provided by the state.
Also, a Coverdell account is only available for parents with individual annual income below $110,000 (double for married couples filing jointly). A 529 plan, on the other hand, has no income limit.
Did the Tax Reform Change Section 529 Plan?
The tax reform plan led to the expansion of the Section 529 Plan. This means that one can use as much as $10,000 every year to service private, public, and religious schools' expenses; and tuition for k-12. Before the tax reform, one can only use a Coverdell account for primary and secondary school education.
Whatever is left in a 529 plan can be transferred to a qualified ABLE account designated for the beneficiary of any qualifying relative.
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