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College Savings Plans – Are They The Best Choice For My Child?
College savings plans, also known as Section 529 plans, are one of the best ways to save for college because they provide:
– tax benefits
– Variety of investment options
– Flexible Contribution Options
– Parental Control
– Reduced impact on eligibility for need-based financial aid
tax benefits
Investments in 529 plans are generally exempt from federal taxes. Earnings are tax-deferred and not subject to capital gains taxes. Redemptions are also exempt from federal income tax if used to pay for tuition, room and board, fees, books, supplies, or equipment.
Most states also offer tax benefits, at least if you enroll in a plan for your state. In addition, contributions may be deductible on your state income tax.
In addition to these income tax advantages, college savings plans can be a valuable estate planning tool. The accelerated gift option allows you to make an average gift of more than $11,000 per beneficiary over a five-year period without any federal gift tax. This means you can contribute up to $55,000 per beneficiary in a year without paying any gift taxes. Contributions are immediately removed from the donor’s gross taxable estate (and included in the beneficiary’s estate).
investment options
Most states offer three or more investment options ranging from conservative to aggressive. One is typically an age-based portfolio that invests primarily in stocks while a child is young, then shifts to bonds and money-market funds as the college years approach. 529 plans are managed by experienced investment firms, such as Vanguard, Fidelity and TIAA-CREF.
contribution option
Anyone can contribute money on behalf of the beneficiary, allowing friends and relatives to make the gift of education. In addition, the minimum investment amount required to open an account is typically less than what mutual funds require, making Section 529 plans affordable for low-income households.
States set their own contribution limits for college savings plans. Most states set their limits based on an estimate of the amount of money needed for seven years of post-secondary education. Ranges range from $146,000 to $305,000.
In addition, most states allow you to transfer money from your checking or savings account to your 529 plans on a regular basis. Some states also allow you to set off payroll deductions.
parental controls
The money in a college savings plan is controlled by the account owner, not the child. So if the child decides not to go to college, he or she doesn’t have access to the funds. Instead, the account owner can get their money back (with income tax and a 10% penalty on the income) or transfer the money to another family member.
Impact on Eligibility for Need-Based Financial Aid
College savings plans have less impact on financial aid eligibility because they are considered the property of the account owner (usually a parent) rather than the student.
choose a plan
Most states have their own college savings plans, but you are not required to enroll in the plan in your state. Look into plans in your state first, especially if they offer tax benefits. Other factors to consider when you compare state plans are expenses and investment options.
prepaid tuition plan
Another type of Section 529 plan are prepaid tuition plans. Prepaid tuition plans are guaranteed to increase in value similar to college tuition. So, if you buy shares of one semester of tuition at a state college, those shares will always be worth one semester of tuition, even 10 years later when tuition rates double. These plans offer basically the same tax and contribution advantages as college savings plans, and they are guaranteed by the government. However, because prepaid tuition plans are considered a resource, they reduce need-based financial aid dollar for dollar. Therefore, families who expect to qualify for need-based financial aid should avoid prepaid tuition plans and invest in college savings plans instead. Another option is to roll prepaid tuition plan funds into the state’s 529 college savings plan before college starts.
There are many benefits of college savings plans; However, there are many ways that parents can help a student pay for a college education. Be sure to research as many avenues as possible to make the most informed decision about how to pay for school, and you may end up with the optimal college funding solution.
This article has been distributed by NextStudent. At NextStudent, we believe that getting an education is the best investment you can make, and we’re dedicated to helping you fulfill your education dreams by making college funding as easy as possible. We invite you to learn more about how to find a college savings plan http://www.NextStudent.com ,
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