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Opening a 529 College Savings Plan

Among the many different types of savings plans designed to fund a college education, I’m of the opinion that 529 plans should really be considered. These plans take the best of other types of savings vehicles but avoid some of the many drawbacks. Of the various advantages, the main one is that the in-account earnings are tax-exempt when they are used to pay for qualified education-related expenses. This is even better than what you would get in a traditional IRA or 401k, where distributions are taxed as income. This is one way that makes the 529 plan an attractive way for paying for education. Even with that in mind, it helps to know about other options you have.

Other Ways to Pay for Education

Among other ways to pay for college education, you have the option of using the Coverdell Education Savings Account. This type of account offers the same tax exemption, but with lower contribution limits. Likewise, high earners are phased out of these plans.

You want to keep in mind that a well-funded 529 plan may be less of an obstacle for a child to get financial aid that includes scholarships, grants, and student loans. The reason for this is that those plans must be registered to the person making the contributions rather than the person receiving the education.

This is an important distinction from accounts and trusts in which the account is registered to the child, meaning that financial aid can be adversely affected. The account is still an asset belonging to its owner, meaning that there is a chance it affects financial aid, but it wouldn’t be to the extent of assets held in the child’s name.

In many states, you can take state tax deductions based on your contribution. So you will want to check your state’s laws. In New York, that contribution has to be made by the account owner, but some states lack income tax, so the deduction doesn’t matter. Just something to keep in mind. California does not allow a deduction.

Another thing I like about 529 plans is that there are no income limits restricting who can contribute. There are limits on the amounts that can be contributed, and they vary by state, but anyone can contribute regularly, even a grandparent who makes half-a-million dollars per year.

The account owner keeps control over investments in the account and can change beneficiaries if necessary to someone else in the family, meaning that it can be a child or someone older who is pursuing an education. This too varies from state to state, however, so you will want to consult the laws for the state you live in.

If you have any questions about 529 plans and whether they are right for you, feel free to contact me with any questions you might have.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing All investing involves risk including loss of principal.

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