You may have heard that a wise investment gift for a young grandchild is to open or contribute to a tax-advantaged 529 college savings plan. But what exactly is a 529 Plan?
1. Tax Benefit – 529 Plans are versatile savings accounts that offer federal, and sometimes state tax benefits. They are operated by a state or educational institution and are designed to help families set aside funds for future college and K-12 education costs.
2. Earnings – Although contributions are not deductible, earnings in a 529 Plan grow federal tax-free and will not be taxed when the money is taken out to pay for higher education expenses.
3. Higher Education Expenses – The definition of higher education expenses in 529 Plans has been expanded through the years. In 2015, computer expenses were added and in 2017, it was further expanded to include up to $10,000 for K-12 tuition.
4. Control – The 529 Plan owner retains full control over the account, including the right to ask for the money back at any time. No other investment vehicle affords this combination of control and estate reduction.
5. Withdraw Penalties – Funds can be withdrawn at any time, but the earnings portion of non-qualified withdrawals will incur income tax and an additional 10% penalty tax.
6. Variety – 529 Plans can be used to meet costs of qualified colleges nationwide. In most plans, your choice of school is not affected by the state your 529 savings plan is from. For example, you can be an Ohio resident, invest in a Vermont plan, and send your student to college in Indiana.
7. Financial Aid – Saving money in a 529 Plan will have minimal impact on financial aid. By contrast, if you were to put money in a traditional investment account in your grandchild’s name, those sums would be factored into the family’s expected contribution.
8. Transfer – Should your granddaughter get a full scholarship to college, no worries. You can just name another person as the beneficiary—they can be any age and needn’t be related.
Beacon Associates can advise you on your options for 529 Plans.
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