As parents of young children see teenagers head off to college for the fall semester, they may be fretting about how they’ll be able to meet the rising cost of tuition when their time comes.
That includes looking at 529 plans that offer special tax benefits on college savings and are named after the Internal Revenue Service code that regulates them. Accounts can be set up through a state agency or pre-paid university and college programs.
Let’s look at the tax advantages, the home-state factor and the best way to protect the account from market losses.
Q: What are the tax advantages of a 529 plan?
A: Earnings in 529 plans are not subject to federal tax, and in most cases you do not pay state taxes as long as you use the money for eligible college expenses. That typically means tuition, room and board, and mandatory fees. Books and computers also qualify when they are required.
Money taken out of the account for reasons other than college expenses will be subject to income tax and a 10 percent federal tax penalty.
The Securities and Exchange Commission offers an introduction to 529 plans with some basic information on taxes and other issues on its Web site at: http://www.sec.gov/investor/pubs/intro529.htm.
Many states offer additional benefits including income tax deduction or tax credit for some or all of the contributions you make, which reduces your state tax bill. States also allow your taxes on earnings to be deferred, which allows your account balance to grow faster. They also do not require you to pay taxes when you take the money out for qualified college expenses, which means you have more money to spend for college.
The College Savings Plan Network offers a helpful comparison tool. You can plug in various tax benefits and find out which states offer them. It’s at: http://www.collegesavings.org/planComparison.aspx.<br …
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