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College Financial Aid: All About 529
College Savings Plans
By
MySpendingPlan.com Editorial Staff
Putting your child through
college has become very expensive, what with education costs and college
tuition fees increasing every year, well beyond the rate of inflation.
Thus, it is important to start saving for college well before it’s time
for your kids to go. Only then will you be able to help them finish
their education without being totally buried under student loans. This
article discusses 529 Plans which are excellent college savings plans.
About 529 Plans
529 college savings plans are
more like an investment account where you can save money that will
eventually go towards financing higher education. All the money that
the plan accumulates (principal and interest) is tax free. You do not
have to pay any tax when you withdraw the saved money from the plan.
However, the money can only be used for higher education and nothing
else, regardless of whether it is at a public or private institution, or
it is a graduate or under graduate program. The money saved under a 529
plan can be used not only to pay college tuition, but also all college
fees, room and board expenses, books and materials, school supplies,
etc.
Regardless of your income or
which state you live in, you can save in a 529 college savings plan.
All the states have different 529 plans, but you are not restricted to
the plan of your state. You can save your money in any state’s 529
college savings plan. However, you get the tax benefits only if you
save in your own state.
Benefits of 529 College
Savings Plans
- The major benefit of 529
college savings plans is that you can save the money tax free.
Therefore, unlike other investment options where you have to pay tax
on your earnings, 529 plans do not incur any taxes.
- Since contributions to a
529 plan are considered a gift by the law, you can put up to $11,000
into these plans each year and not pay any gift tax. Therefore,
these plans are also a great way to transfer money from your estate
to your children without incurring any tax liability. What’s more,
you can even change the beneficiary of the 529 college savings plans
if you so wish.
- Most custodial accounts
that are set up for your children’s education only allow you to
control the money until your child becomes a legal adult. However,
with 529 college savings plans, you get to control the money
throughout the life of the plan. How the money is withdrawn and
when will always be under your control.
- 529 plans set up as
college financial aid for your children give you a lot of
flexibility. You can open separate accounts for all your children
and more than one account per child. Accounts can also be started
by grandparents. If the money set aside in a particular 529 plan is
more than what you need for that child’s education, the excess money
can be transferred into another 529 savings plan, even that of
cousins, nieces or nephews.
Although the 529 college
savings plans do have many benefits, there are some disadvantages too.
You do have a say in which type of account you want to open, but how
that money gets invested is not under your control. That is decided by
the state. Moreover, if you do not use all the money for education but
use it for something else, you will attract high penalties.
All in all, even with their
drawbacks, 529 college savings plans are among the best ways to save for
college. Along with giving your children the college financial aid that
they need, you also have the security of knowing that you children
cannot misuse their 529 college savings plans.
Before you decide which 529
plan to choose, make sure you consult with a financial advisor who will
be able to help you judge which the best plan for your needs is.
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