529 Plans done right!
We get questions all the time regarding 529 Plans. Below we are going answer the most common ones:
- What are 529 Plans?
- How do 529 Plans work?
- How does a 529 Plan help with my taxes?
- What can I use a 529 Plan for?
- Who may I setup a 529 Plan for?
- State Tax Advantages
What are 529 Plans?
529 Plans are tax advantaged college savings plans. They were signed into Federal legislation in 1997 after many states had set up their own state versions of college savings plans
How do 529 Plans work?
There are two type of 529 plans.
- Where you pay for your child’s college tuition at today’s rates, and it can be used for future enrollment (i.e. pay today’s cost of college, for tomorrow)
- Only 10 States offer prepaid 529 Plans – FL, IL, MD, MI, NV, PA, TX, VA, WA.
- These plans are different from Prepaid Plans since the savings is based on the market growth of how your money in the savings account preform over time.
How to 529 Plans help with Taxes?
The savings are similar to a Roth IRA. You get the benefit when you withdraw the money, but not when you contribute to the plan.
Ex. You place $6,000 in your daughters 529 Plan when she is 10 years old. You get no deduction when you contribute the money to the plan.
In 10 years when she is ready to go to college, the value of the plan has grown from $6,000 to $15,000. When you use the money for a qualified expenses, you do not have to pay any tax on the $9,000 gain.
What can I use 529 Plan funds for?
You may use the funds for qualified expenses, such as:
- College & University tuition, fees, books, supplies
- Private School (up to $10K per year)
- Pay down Student Loan debt ($10K lifetime max.)
Who may I fund a 529 Plan funds for?
You may fund a 529 Plan for anyone, as long as you have the person’s social. Examples are: your kids, nieces, nephews, cousins, neighbor’s kids, etc.
However, we recommend you discuss with the parents of whom you are funding the plan first.
State Tax Advantages
Some states offer additional tax benefits if you fund 529 Plans through specific State Programs. For instance, the State of Idaho has a special state plan that allows for additional tax deductions on the Idaho State Income Tax Return, if you fund through their program, called Ideal – Idaho College Savings Program.
Check with your state to see if they have any special tax savings programs.