The College Board Website offers cost calculators for families seeking real numbers when it comes to looking into the future of college costs. While the end numbers may be shocking, using the knowledge to create a college savings plan is a smart move. The tax advantages of a 529 Savings Plan helps families save for future college costs.
What is a 529 Plan?
This specific college savings plan, created in 1996, was named after Section 529 of the Internal Revenue Code. These education savings plans are operated by a state or educational institution and are designed to help families save money for college. Nearly every U.S. state now offers at least one 529 Plan.
Investors are free to choose any state plan, regardless of the state of residence or the location of the college. Typically, college choice is not affected by the state where the 529 Plan originates. Consumers are encouraged to choose the plan that best meets the needs of the family.
What are the Benefits of a 529 Plan?
There are many federal tax benefits for investors of a 529 Plan. Individual states may also offer state tax breaks for residents. The plans are easy to start-up online, and require little maintenance after initial set-up. The investor usually has flexibility, though, to make changes to 529 Plans after they are set-up.
Other benefits include:
- no annual IRS tax reporting forms until the funds are actually withdrawn.
- universal eligibility, meaning anyone can open a 529 Plan, regardless of age or income.
- high annual limits allow investors to put in a substantial sum of money, if desired.
How to Choose a 529 Plan
There are currently 118 different 529 College Savings Plans available for investors. Each family, based upon individual circumstances and savings goals, must decide upon the appropriate savings plan.
Many online tools are available to compare benefits of each plan. Financial advisors are also helpful for families trying to decide which 529 Plan best meets their needs. Investors may want to first check into their own state's plan to see if their state tax incentives offer a great advantage over plans from other states. Beyond that, potential investors should compare costs of 529 Plans so that fund fees do not eat up much of the money saved. Compare costs and other fees through sites such as Saving for College, where potential investors check off the features most important to them to gain a listing of plans that meet those goals.
By opening a 529 Plan and making regular contributions into it, families can take most of the sting out of tuition costs down the road. Study the various plans available and make the best choice based on the finances of the family. Start contributing now. Even small monthly amounts add up fast. Early and regular contributions to a 529 Plan allow families to accrue enough money for the ever-rising cost of a college education.
References:
Karp, Gregory. The 1-2-3 Money Plan. Pearson Education, Inc: 2009.
Websites: Savingforcollege.com and Collegeboard.com.
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