(CMPS® – Institute – Improve Lives Through Mortgage Planning)
- Invest funds after you’ve paid taxes on them (similar to a Roth IRA)
- Grow the money tax-free over time (no taxes on dividends or asset appreciation)
- Withdraw the money tax-free to pay for qualified college expenses
- #1 – Each State Sponsors its Own 529 Plan(s), But You Can Invest in Any Plan that You Want
For example, if you live in Florida, you can invest in a New York plan and send your student to a college in California. The plan is sponsored by the state, but the state hires a money manager to manage the plan and pick the investments. There are several web sites that rank the various plans in each state, including Morningstar.com and SavingforCollege.com. Click here to view a list of plans and how they rank as analyzed by SavingforCollege.com. You can view the rankings over a 1-year, 3-year, 5-year or 10-year period of time.
Although you don’t get a federal income tax deduction for investing in a 529 plan, some states offer a full or partial tax deduction against your state income taxes (see a tax advisor for details). Also, unlike other types of investment accounts, 529 plans don’t have restrictions based on income or age, and there are no annual contribution limits. However, you can only contribute up to the amount necessary to provide for the qualified education expenses of the student. Keep in mind that the plan can be funded by anyone, including parents, grandparents, friends and relatives.
#2 – The Investment Grows Tax-Free, and the Student Beneficiary Can Withdraw the Funds Tax-Free to Pay for Qualified Education Expenses
The funds in the account grow tax-free. The student beneficiary can withdraw the funds tax-free to pay for tuition, fees, books, equipment, room and board at an eligible educational institution. According to the IRS, “An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.” Click here to view a list of schools that are eligible institutions.
In conclusion, 529 College Savings Plans could be a great way for you to contribute to a child’s future. Please see a financial advisor for more details.
PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 970.