Saving for your child’s higher education is one of the most important investments you can make for their future. To make saving for college easier, the Qualified Tuition Program or the 529 plan was established. The 529 plan is a federal-income-tax-free savings plan to be used exclusively for qualified educational expenses.
Research shows that a college education can lead to increased income and better job prospects. Unfortunately, the rising cost of tuition has become a budgetary issue for many families. Tuition prices have jumped so much that if you want your child to graduate from college debt-free (or close to it) you better start saving now.
The benefit of subsidizing college with a 529 account are varied. Below are a few reasons worth considering:
College is expensive. The earlier you start saving, the more time you have for your savings to work for you. Even saving small amounts will eventually gain larger dividends down the road.
Cover more than tuition. A 529 account can be used to pay for all the costs associated with higher education, including textbooks, computers and other necessary materials.
Use towards technical education. In addition to tuition at public or private colleges, the 529 savings can be used towards trade schools. These types of educational institutions are becoming very popular mainly due to the increasing costs of traditional universities.
Tax benefits. The state of California offer tax-advantaged growth as well as a way to potentially shrink your taxable estate. While contributions to California’s plan are not deductible at the state or federal level, all investment growth is free from state and federal taxes, and the earnings portion of withdrawals for qualified education expenses are income tax free. Additionally, the California 529 plans allow individuals to contribute up to $15,000 per year per account without triggering any federal gift taxes or using any of your lifetime gift tax exclusion amount. The IRS Publication 970, “Tax Benefits for Education”, explains how to calculate the taxable portion of distributions. (Please consult your tax advisor regarding potential tax benefits).
Lower student debt. A 529 savings account can help ease the burden of student loans and lower the amount that is borrowed.
Flexibility. There are two different types of 529 savings accounts. A 529 plan permits you to move money around to different accounts within the plan. Keep in mind that each plan has its own set of rules, so do your homework before making changes that could unfavorably affect your investment.
• Prepaid tuition plans – These plans allow for the pre-purchase of tuition with money to be disbursed when the student enters college. These prepaid tuition plans are usually managed by state organizations or by colleges and universities themselves. Most of the time, the funds in these types of plans cannot be used for room and board.
• Savings plans – Most of these plans invest in mutual funds, certificates of deposit and are dependent on the investment return of these assets.