529 college plan
The 529 college plan is a program to invest for meeting the college expenses in the future. It is a state sponsored plan and the state chooses the company and you can open a 529 college plan account with that particular company adhering to the criteria set by the state. All your dealings will be with the company and not directly with the state. You will be the owner of the account, with the person for whose educational purposes the account is being opened being the beneficiary.
You also have two options while opening a 529 college plan account. You may choose to prepay the tuition fees at the rate prevalent currently at a recognized educational centre. The second option gives you the chance to save your earnings in a tax-deferred account, which could be later used to pay for education at the then existing rates. Either way, the money you invest will be growing at a rate good enough to get you enough resources to meet your beneficiarys college expenses. However, the option for the savings account is more popular.
Benefits of 529 college plans
1. One of the major benefits when you go for a 529 college plan is the tax exemption that you will be eligible for. The money withdrawn from the account and used for qualified educational expenses, are completely exempt from federal tax. Therefore, unlike with normal investments, you neednt pay any tax on the earnings in your 529 account provided you use them for purposes outside that of educational expenses. In addition to this, some of the states provide the option to deduct a part of your contributions towards the 529 account from your respective state taxes.
2. Another advantage with 529 accounts is that the account owner and not the beneficiary enjoy full control over the dealings of the account. This puts to rest the worries of parents that their wards may utilize the funds in the account for other purposes of their own choice thus making the very purpose of the account void.
3. As there are no restrictions for the person who is opening the account for another person, you may do so for literally anybody. In addition, anyone can contribute to an account.
4. Unlike with ESAs, where a single person who earn more than $110,000 per annum ($220,000 in the case of married couples) cannot contribute, the 529 plans do not have any such restrictions. Also, contributions up to $11,000 made towards 529 accounts qualify for exclusion from annual gift tax for the first year, and hence you can contribute up to $55,000 to your 529 account.
5. In most places, there are no limits as to the time and age for to use the money in the 529 account. Thus, if your ward opts to discontinue the college for any period, you may transfer the account to another person if he/she belongs to the same family of the first beneficiary.
The shortcomings of 529 college planOne of the major limitations with the 529 college plan is that, as 50% of the money withdrawn from the account in the first year, will be included on your wards tax return. This will affect his/her eligibility for the next year by an amount equal to 50% of that amount.Your control over the investment is limited to the fact that you can only transfer the account over to a plan in another state, once a year without being penalized.If you need money for purposes other then educational, you will be taxed for the amount along with a 10% penalty.
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