If you have college bound kids, you should be aware of the 529 college savings plan, one of the best ways to save for your kids’ education future. The 529 college savings plan is a tax-free mutual fund investment option for any college or university in the country.
Many parents are not sure if the 529 college savings plan is the best option . There are calculators available to help make that decision. You can compare your estimated earnings in a regular taxable account with what you would earn with a 529 college savings plan. Depending on how much time you have before the college years, you are subject to come ahead with the 529 college savings plan.
Weigh your options
Before you begin using a savings plan estimator, there are a few things to keep in mind. First, most calculators only work with college savings plans. Consider a prepaid tuition plan only if you are certain that the beneficiary of the plan will attend one of the participating schools. These plans guarantee today’s tuition rates for the future. Withdrawals from prepaid tuition plans are also tax-free.
Federally tax free withdrawals for qualifying college expenses from a 529 college savings plan are considered gifts for federal tax purposes. This is applicable for annual contributions not greater than $12,000 for individuals, and $24,000 for married couples making joint contributions. You can also make a lump sum payment equivalent to five years worth of contributions which total $60,000 for individuals; $120,000 for married couples.
Also keep in mind that you must set up a separate 529 college savings plan for each child or grandchild. The limits would apply to each account separately.
Gains from investments related to your 529 college savings plan is subject to the lower capital gains rate, if held for more than one year. The same rule applies for qualified dividends. However, short-term gains and interest are taxed at your regular tax rate.
How the tax savings calculator works
Generally, most tax savings calculators will require the following information: the number of years remaining until the child enters college ; the estimated rate for a college fund if you invested in a taxable account rather than a 529 plan; whether you will make a lump sum payment or installments and the number of years you will contribute; and, the average return expected.
Results will give the estimated value at college age; estimated after-tax value at college age; and, the amount you will have and percentage gained from investing in a 529 college savings plan.
Finally, estimates are just that – estimates. You will not know the exact amount until you begin investing. However, educating yourself prior to selecting a plan helps you to understand what to expect.