Personal Finance

Section 529 Plans — An Option for College Savers

Before your child even takes that first step, you’ll probably make some important decisions about the future. One of those decisions might involve the best way to save for college. Section 529 qualified tuition programs (QTPs) are an option to consider.

Prepaid or Savings?

There are two types of 529 plans. Prepaid tuition plans basically lock in tuition at today’s prices at eligible colleges and universities. Plans cover tuition and mandatory fees. Some plans allow you to purchase room and board or use tuition credits for other qualified expenses. Plans typically are guaranteed or backed by the state.

529 college savings plans are tax-exempt savings vehicles that offer a variety of investment choices, ranging from aggressive to conservative. Money can be used to pay qualified higher education expenses, including tuition, mandatory fees, room and board, and required books, supplies, and equipment. Before you choose a plan, make sure you’re comfortable with the level of risk involved.

Both types of plans allow the benefit to be transferred to another family member if your child doesn’t use the funds.

Contributions and Taxes
Anyone can contribute to a college savings plan for a child — parents, grandparents, aunts, uncles, friends, or acquaintances. Plan earnings are free from federal — and often state and local — income taxes as long as they are used for eligible college expenses. An accelerated gift option allows individuals to contribute $70,000 per beneficiary, averaged over a five-year period, without incurring federal gift-tax consequences, making 529 plans effective estate planning tools.

Making a Choice

You are not limited to investing in a plan offered in your state. Compare the costs and features of several plans before you make a decision.

Source: DST

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