Been crunching the numbers, trying to determine how to save for
your child’s college education? Here
’s a figure you can learn to like: 529.
Been crunching the numbers, trying to determine how to save for your child’s college education? Here’s a figure you can learn to like: 529.
Why that particular number? Because IRS code section grants tax-exempt status to qualified tuition programs (QTPs) – which means you get a tax-favored way to accomplish your goal.
How QTPs work.
You have the choice of investing in prepaid tuition plans or savings plans. Both are usually established and run by individual states. With prepaid tuition plans, you’re buying a guarantee that lets you pay for tomorrow’s public college expenses today. There’s also a prepaid plan for private college tuition. In contrast, savings plans are a way to set aside money and let it grow, tax-deferred, to pay for future costs at a variety of institutions. You’re responsible for making decisions regarding beneficiaries and distributions. The assets, typically invested in mutual funds, are considered yours for purposes of financial aid. Withdrawals, when used for qualified expenses, are free from federal tax.
Who can invest.
Pretty much anyone with cash to invest can establish a 529 plan, since there are usually no limitations on age or income level. In addition, participating in other college savings programs isn’t prohibited.
Caution: Some states do have rules about how old the intended recipient of future distributions can be. However, you’re not restricted to your own state’s plan, and you can roll your account into another qualified plan, without penalty, one time per year.
How to invest.
You can establish a 529 savings plan through your financial advisor or on your own, directly from a provider. Either way, you’ll find a range of fees and investing options. Plans also have differing limits on maximum contributions. Minimum amounts may vary as well
Kerry Lorincz is a partner in Bianchi, Lorincz and Company.
