Posted by : Daniel Stoica in (Blog, Income Taxes, Tax Deductions) On: May 26th, 2011
Tagged Under : 1099, 529 Savings Account, beneficiary, contributions, Daniel Stoica, deductible, education, enrollment, federal tax break, funds, income tax breaks, investment, Pension Protection Act, State Tax Benefits, student, tax free, tax-deferred, treasurer, Uniform Transfers To Minors Act, withdrawal
A 529 Plan is an education savings plan that is operated by a state or educational institution and is designed to help families set aside money for future college tuition and fees. This plan is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996. Here are 7 reasons why opening a 529 plan might be beneficial to you.
Federal Tax Benefits
529 plans offer supreme income tax breaks. Even though your contributions are not deductible on your taxes, your investment grows, tax-deferred, and distributions are paid out tax-free. The tax-free rule was made permanent with the Pension Protection Act of 2006.
State Tax Benefits
Your state might offer tax breaks in addition to the federal tax break. It would be wise to research what benefits you can get for investing in your state’s 529 plan. If your state doesn’t offer these benefits, you can choose the federal 529 plan.
Donor retains control of funds
With a 529, you are in control of the account. The named beneficiary, the student, does not have access to the funds. You decide when money is taken out and for what purpose. Most plans let you get back the funds for yourself any time. However, the earnings part of the “non-qualified” withdrawal is subject to taxes and an additional 10% penalty tax. Compared to an account under the Uniform Transfers to Minors Acts, you will se that the 529 plan gives you more control of how your investment is used.
A 529 plan provides an easy way to save for college. Once you decide on the right 529 plan, you will need to complete an easy enrollment form and begin making your contribution. You can also sign up for automatic deposits. The continued investment of your account is taken care of by the plan itself. The plans assets are professionally managed by the state treasurer’s office or by an investment company.
Simplified tax reporting
You won’t need to fill out a 1099, which reports taxable and nontaxable earnings, until the year you make withdrawals on the 529.
You can make changes in your 529 program every year, or you can roll it over to a different state’s program provided you haven’t done so in the prior 12 months. There is no federal limit on the regularity of these changes if you replace the beneficiary with another qualifying beneficiary at the same time. Each 529 plan has different rules that affect the number of changes you can make, so take some time to research each one if you think you might need this benefit.
Substantial deposits allowed
Everyone is eligible for a 529 plan, and the amounts you can deposit are sizeable; over $300,000 per beneficiary in many state plans. There usually are no income limitations or age restrictions.
If you are considering going back to college or graduate school in the future, check with an accounting or tax professional about a 529 plan. It could be one of the best investments you can make for your family’s education. There isn’t much to think about, except which plan is right for you. A little money deposited into the account each paycheck will add up, and your future student will (should) thank you.