529 Plans: Where to Begin
Do you know about 529 savings plans? A 529 Plan, named after Section 529 of the Internal Revenue Code, is a college savings plan that provides tax benefits to encourage contributions into the plan. There are two types of 529 Plans: Prepaid Tuition Plans and Education Savings Plans. With a Prepaid Tuition Plan, a party purchases credits at participating colleges for future tuition. In an Education Savings Plan, the more common 529 Plan with more flexibility in terms of how it is used, a party chooses a specific investment portfolio in which to invest money that can later be withdrawn to pay qualified education expenses.
Every state offers at least one 529 Plan, but the benefits and fees vary so it is important to shop around and research each individual plan available to you before contributing. For example, although 529 Plans are funded with dollars that have already been taxed by the federal government, some states offer state income tax deductions on amounts contributed to 529 Plans. Unless you are investing in a Prepaid Tuition Plan, you may find it makes more economic sense to participate in a 529 Plan sponsored by a state other than the state in which you reside because of the plan’s particular benefits.
Although the details of the plans vary, a universal benefit of the 529 Plan is that the earnings that grow over time in the 529 account are tax-free. Accordingly, the longer the money is invested into the 529 Plan, the more growth and tax benefits you will see. There are also significant estate planning benefits associated with contributing to a 529 Plan.
For more information on 529 savings plans and how they may benefit your estate plan, contact our office today to schedule a meeting.