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529 College Savings Account
Saving for Your Child's College: The 411 on 529s
By JosephKenny
With the cost of college is skyrocketing seemingly on a daily basis,
who's to say how much tuition will cost once your child leaves the
nest? That's why it's important to save in any way you can. Is it as
important as saving for your own retirement? No. With Social
Security an instable option at best and with pension plans going the
way of the dinosaur, you're pretty much on your own when it comes to
retirement. Your child, however, will have several options when it
comes to paying for college. Financial aid, student loans and
scholarships are just the beginning. Regardless, it's many peoples'
goal to help their child through college. With savings plans like
the 529 college savings account now available, you too can reach that goal.
Simply put, the 529 plan is a state-sponsored vehicle to help you
save pre-tax dollars to go towards your child's college education.
There are two 529 options: the savings plan and the prepaid tuition
plan.
Through the prepaid plan, you're able to pay for your child's
school at today's tuition rates, even though they won't actually be
attending until years down the road. The amount in your 529 college
savings account account
is guaranteed to pay for tuition to your state's public colleges and
universities when your child is ready to attend. It's quite the
deal, though it usually doesn't cover room and board costs.
One of the main drawbacks is that you or your child will have to
be a resident of the state where your child attends college, which
puts a damper on things if your California kid suddenly decides they
want to attend Harvard. It depends on the contract, though. Some 529
plans do allow students to attend private or out-of-state
universities, but you might have to forfeit some of the value of
your account.
A safer and more flexible option than the prepaid plan is the 529
college savings plan. Through it, your child will be free to attend
any university, public or private, in-state or out, and it includes
room and board. The downside? The money you put into the college
savings plan is only good towards whatever the cost of college is at
the time your child is ready to enroll. No one know what that'll be,
but it won't be cheap.
Most states put a cap on lifetime contributions to
529 college
savings account plans that range between $100,000 and $275,000, though most
don't have a limit on how much you can invest annually. Problem is,
contributions of over $12,000 per year ($24,000 if you're married)
are subject to a gift tax. There's a loophole here, however. You can
invest up to $60,000 in one year to a 529 and it will be treated as
five yearly payments of $12,000. But beware; going this route will
leave you unable to make another deposit for the next five years.
So where does your money go when you put it into a 529 savings
plan? Much like a 401(k), the goals is to invest aggressively early
on, then choose the safer path the closer you get to needing the
money. If you choose an age-based portfolio, your money will be
invested in stocks early in your child's life, and then moved to the
bond market as he or she gets closer to college.
The 529 college savings account plan offers enormous tax savings if you use the money for
its stated cause--putting your child through college. Though your
contributions to the fund are not considered tax-deductible, it will
grow free of taxes and any withdrawal is also not subject to federal
taxes. Depending on where you live, you might also get state tax
deductions or exemptions from contributions or withdrawals.
The one big-time fallback to the 529 is the fact that it may
limit your chances of receiving financial aid. That's because
withdrawals from the account are considered part of your child's
income, and will be assessed for financial aid purposes. It may or
may not be an issue, depending on how much you have saved in the 529
account.
About the Author
Joseph Kenny writes for the Loans Store who can offer cheap
loans to UK
residents and
secured loans if you have a poor credit history.
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