College is expensive. Statistics indicate that it is just getting more and more expensive every year. Even the books are hundreds of dollars apiece. Expenses like student fees, student government, supplies, and costs related to extracurricular activities add up quickly. If parents want to help their children pay for college, they will need to start saving years in advance. However, parents still need to pay income tax on regular savings accounts as they earn interest. But, what if there is a way to avoid paying income taxes on your savings’ account growth? Thanks to 529 plans, you can.
If you’re in the South Boston, VA area, talk to Kenneth M. Perkins, a tax professional, for more information about the specific benefits of 529 plans. There are more than just tax benefits, and Kenneth can help you or your family pick the right plan for you or your loved one.
A 529 plan is a way for parents and grandparents to save money for their children or grandchildren. In fact, the beneficiary of the plan, the student, could even be the same person that opened the account—that means that you can save for your own education as well! Your 529 plan has two major tax advantages. First, the interest that you earn on the account is not taxed. Second, although contributing to the account is not tax deductible, you do not have to pay taxes when you withdraw the funds for educational expenses.
Usually, there can be only one beneficiary for each plan, but many people can contribute to the plan. That means that you could own the plan, but your parents, aunts and uncles, grandparents, and even your friendly neighbor could contribute to the plan. You can even change the account owner without incurring tax penalties in the unfortunate occurrence of the beneficiary’s death.
There are two types of 529 plans. The type of plan that is available to you that will depend on where you live. This is because each state runs their own 529 plan. Some states have more than one option, but other states do not.
The first type of 529 plan is basically a savings investment plan. Your state will determine the specifics of how your funds are invested, but they do more than just sitting in a savings account. The other type of 529 plan functions as if it is prepaid tuition. Basically, you’re locking in tuition prices as they stand when you start the account. This can be extremely valuable, because college tuition seems to increase virtually every year.
Usually, your funds will be invested into a large mutual fund with extremely well known companies such as Vanguard. Each plan, much like a retirement plan, allows you to pick a mix of bonds and stocks. You can set this up yourself, but you are generally limited to two approaches.
The first adjusts based on the beneficiary’s age. While the beneficiary is young, the mix of bonds and stocks will likely have more stocks, which reflects a riskier portfolio. As the beneficiary’s age increases, this mix will change to more bonds than stocks, making it less risky, but with a lower return. This option is popular because adjust automatically so the beneficiary gets the highest returns in a safe way.
The other option is to just let the account mix of stocks and bonds stay the same until the beneficiary is ready to withdraw. Even with this plan, however, you can still adjust the relative risk by changing the proportion of stocks to bonds to fit your preference for risk. Stocks are generally riskier, but this risk also comes with usually increased returns. You can even invest in international stocks and bonds in some cases.
The program manager for your 529 plan will be able to give you very detailed information for your location. Your tax professional can also provide you with insights to help you pick the best plan for your financial situation.
Almost every state has a 529 plan, and many states have more than one option. You can enroll in a 529 plan by speaking directly with the 529 plan manager. You also may be able to enroll using a financial adviser. Keep in mind, however, that there may be fees associated with the 529 plan. These can include advisor fees, investment fees, maintenance charges, and program management fees.
Your tax preparer may be able to help you set up a 529 plan for yourself or for loved one. Kenneth M. Perkins can walk you through the tax benefits of a 529 plan. Use the contact button below to contact Kenneth, or click on the profile link for more information.
Kenneth M Perkins CPA/PFS