Looking for a tax-advantaged college savings plan that has no
age restrictions, no income phase-out limits, no residency
requirements
— and one you can use to pay for more than just tuition?
Looking for a tax-advantaged college savings plan that has no age restrictions, no income phase-out limits, no residency requirements — and one you can use to pay for more than just tuition?
Consider the 529 savings plan, an increasingly popular way to save for higher-education expenses, which have more than tripled over the past two decades. Named after the section of the tax code that authorized them, 529 plans (also known as qualified state tuition programs) are now offered in almost every state.
Most people have heard about the original form of 529, the state-operated prepaid tuition plan, which allows you to purchase units of future tuition at today’s rates, with the plan assuming the responsibility of investing the funds to keep pace with inflation. It’s practically guaranteed that the cost of an equal number of units of education in the sponsoring state will be covered, regardless of investment performance or the rate of tuition increase. Of course, each state plan has a different mix of rules and restrictions. Prepaid tuition programs typically will pay future college tuition at any of the sponsoring state’s eligible colleges and universities (and some will pay an equal amount to private and out-of-state institutions).
The newer variety of 529 is the savings plan. It’s similar to an investment account, but the funds accumulate tax deferred. Withdrawals from state-sponsored 529 plans are tax-free as long as they are used for qualified college expenses. Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States. The risk with these plans is that investments may lose money, or may not perform well enough to cover college costs as anticipated.
Dan Newquist is a registered representative with Linsco/Private Ledger. His office is in Morgan Hill.
