If you are a parent planning on sending your child to college soon, you may want to know about 529 plans. These plans are savings plans with a tax advantage developed by the Federal Government. Ideally, parents or grandparents should start such a plan long before they plan to send their young person to college. Once you get to the target date, you should have a lot of money invested in this goal.
Here’s how it works:
Parents can take out a 529 plan as they plan for their college entrance year and put money into it as often as they want to watch it grow, tax-free. Like an IRA, this money is never eligible for tax payments, so it is protected from being taxed.
One of the most significant advantages of the 529 plan is that anyone can contribute to this plan. The person who is making contributions does not even have to be related to the beneficiary. Like insurance, there has to be a reasonable interest in helping the person attend college and to help pay their tuition and college fees. The only requirement of the beneficiary other than this is that they must have a valid social security number. So parents may start this plan anytime after their child receives their social security card (around age 14).
The account owner is the one who controls the money and ultimately distributes the money to the right person.
Monies from the 529 plan do have to be used for college expenses. However, there is no requirement that the person must attend college immediately after high school. They may work for a year or so if they choose to and the money will be there whenever they are ready to start college.
An additional benefit of a 529 Plan is the fact that you can use it to fund K-12 education in private institutions, as well as colleges and universities. This gives parents an option to send their kids to private schools, which are quickly becoming popular across the country today. Parents want to have these options so that they can better control what curriculum and activities their children take part in.
This federal plan allows parents to choose how the funds will be used, provided it is used for educational purposes. Additionally, you can save on your investment by having no tax requirement. They are not tax deductible because there is no tax charged.
Want to learn more? Bankrate provides an extensive overview on how to save for your child’s future education, including the best ways to save, when and how you should start saving, and the pros and cons of the various investment options.