529 Plans:concept

With the rise in college education expenses , more and more parents are trying to offset some of the cost by putting money aside to help pay for their child’s education. In 1996 the 529 plans were created to provide some tax benefits for those who are trying to save money for higher education.

How a 529 Plan Works?

529 plans are state-sponsored , but the underlying principle is that these plans allow individuals to save and invest money and provide tax benefits if the funds are used for higher education expenses. Similar to IRAs, they usually allow you to invest in money markets, stocks, bonds, and mutual funds.

529 plans allow individuals to make significant contributions into the plan.

A one-time lump sum contribution of five years’ worth can be made and bypass the gift tax provided no additional contributions are made during those five years. All contributions are then invested and grow tax deferred.

Finally, when it is time to begin taking distributions from the account, provided the funds are used for a qualified educational expense as defined by the plan, the withdrawals are tax free. Similar to an IRA, if the distributions are not qualified, the earnings would be subject to taxes in addition to a 10% penalty.
Additional Benefits

While you are generally able to participate in any of the 529 plans, there may be an added benefit to take part in the plan where you reside. Some states actually allow some contributions to be tax deductible. So, not only does your money grow tax deferred and possibly tax free, but you may be able to receive a tax deduction on some contributions as well.

Another feature that can make a 529 plan attractive is the flexibility of changing beneficiaries. If the child for whom the plan was set up for doesn’t attend college or doesn’t use all of the money inside the plan, the plan can be assigned to another beneficiary.

Some Drawbacks
Since these plans allow you to invest the money just as you would for retirement, it also means there is some market risk. With any investment, there is a chance that your holdings could decline in value.