Some of the most effective ways to save for college provide tax advantages that let you make the most of your savings. Among the most useful are two 529 programs. Here's a summary of their basic features:
529 COLLEGE SAVINGS PLANS
- Invest post-tax income in a 529 Savings Plan account for a specific beneficiary and be eligible to withdraw earnings tax-free to pay qualified higher-education expenses at any eligible institution. You can name yourself as beneficiary if you wish.
- The contribution limits are determined by the state sponsoring the plan and tend to be $100,000 or higher, providing the potential to accumulate significant savings over an extended period.
- There are no income restrictions that limit who can contribute or how much they can add each year. However, if any person adds more than $13,000 to a beneficiary's account in one year, or more than $65,000 every five years, the gift may be taxable to the giver.
- The account owner must choose among investment alternatives available in the plan he or she chooses, based on the age of the beneficiary and the account owner's risk tolerance.
- Returns are not guaranteed, and there are fees to participate, so you may not accumulate as much as you need.
529 PREPAID TUITION PLANS
- Prepay college tuition by buying tuition credits at current prices for a specific beneficiary at any public institution included in a specific state's 529 Prepaid Plan or at any institution that participates in the Independent 529 Plan.
- Pay for credits with post-tax income. No income tax is due on any increase in the value of the credits when they are used.
- Each tuition credit covers part or all of a tuition credit when the student enrolls, based on the terms of the specific plan.
- If the student does not enroll in a participating school, the person who set up the account gets his or her money back, but there is little or no gain in value. Admission is not guaranteed.
- In most cases, either the person who sets up a Prepaid Plan with a particular state or the person named as beneficiary, or both, must live in that state.
For more about 529 plans, including how to manage your tax-free withdrawals, visit www.collegesavings.org or www.sec.gov/investor/pubs/intro529.htm
One of the most effective ways to save for college is with a 529 College Savings Plan sponsored by your state. You can find a link to your state's plan at www.collegesavings.org.