529 College Savings Plan


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.


Source by Paul Abbey