The Benefits of a 529 Savings Plan

College is a dream for many young people, but it can leave their parents lying awake at night trying to figure out how to pay for it. However, tax regulations have provided a 529 savings plan that allows for family to assist in saving for younger family members hoping to attend college. Below is an overview of how they work, what are qualified benefits and information about contributions. However, if you have specific questions related to your unique circumstances, then it is important to consult with your tax professional or accountant, such as Bhatia & Co, INC, CPAs in Santa Clara, CA.

What It Is?

The 529 savings plans provide a method of saving for college without paying federal taxes. The plans were originally introduced in 1996, and could be used for a specific named beneficiary. Thus, parents now had a tax free method to offset college expenses. Yet, they could only have one owner per account and only one beneficiary for each account. Still, one owner can have multiple accounts that name the same beneficiary.

These accounts are typically administered by the state, so there are specific guidelines to adhere to, based on your state. For example, most states can decide how much total contributions can be. Therefore, it is important to consult with your local tax professional to determine how much your state allows in total contributions. However, there are also specific federal regulations that must be followed, although the federal rules do support any state limits on contributions.

Any U.S. citizen or resident alien, who is at least 18 years old, can open a 529 account. The beneficiary can be a child, grandchild or even a younger relative, such as a niece, nephew or sibling. If you are considering attending college, you may also consider opening one for yourself, as the 529 savings account has no age limit.

Two Plan Types

There are typically two types of plans, known as the prepaid versus the savings.

• Prepaid tuition plan – This plan essentially locks tuition at today’s prices, which can be beneficial if your child is still young yet. However, prepaid plans can often limit your school choices and will typically only cover tuition and fees. The additional expenses of room and board, as well books and other supplies may not be covered.
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• Savings plan – The savings plan offers the ability to save funds for college without being limited to any specific location. Additionally, the plan’s funds may be spent on a variety of college expenses beyond tuition.
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Choosing a Plan

While most states offer you the 529 plan directly, there are also advisors who can sell the plans. Keep in mind that using an advisor can also lead to additional fees. Therefore, you want to be sure to compare them against the benefits of an in-state tax deduction. The critical thing to remember is that there will be fees, however, there are deductions available that can assist in offsetting those fees.

The money contributed will be invested in mutual funds to grow over time. There are two investment options available. The age-based option invests in higher risk stocks with the potential for greater returns before being adjusted into a bond and cash portfolio as the beneficiary grows closer to age 18.

The static choice means that the investment allocation remains the same over time. Plans can be chosen based on your risk comfort level and your objectives. Your account will have a program manager, which typically picks an investment strategy focused on U.S. stocks and bonds, but with some diversification with international investments.

Qualifying Expenses

Before the funds can be dispersed, the student must be enrolled in an eligible college or university, which must be accredited. Professional and trade schools also may qualify. Contributions can be used for a variety of expenses, some of which are listed below:

• Tuition
• Room and Board
• Books

Approved transactions are often known as qualified withdrawals, but what qualifies can change from state to state. It is important to note that if funds are spent on an unqualified expense, then the tax-deductions will be reclaimed and there may be additional penalties incurred.

When preparing for college, start the saving process early by looking into a 529 savings account. The funds can start being saved to offset the expenses of college, long before the student first cracks a book.

Click on the link below to connect with a tax professional at Bhatia & Co, INC, CPAs in Santa Clara, CA, who can assist you in determining the tax benefits of a 529 savings account in your unique circumstances.