529 College Savings Plan

If you are looking to start saving for college, one of the most popular vehicles for college related savings is a 529 College Savings Plan. Named after Section 529 of the Internal Revenue Code, 529 college savings plans offer more attractive tax benefits for users compared to a standard savings account.  The money in a 529 College Savings Plan grows tax-free, and withdrawals from the plan are also tax and penalty free when used on qualifying expenses. Expenses that qualify under a 529 College Savings Plan would included college tuition, textbooks, room and board, and various other school related expenses.

Should you wish to withdrawal money from a 529 College Savings Plan for expenses that are not qualified, you will be subjected to a 10% income tax penalty. However, should your child choose not to attend college, or is able to pay for college via a scholarship, a 529 College Savings Plan can be transferred to another family member. As long as the money from the 529 College Savings Plan is being spent on qualified college related expenses, you will be exempt from tax and penalty on your withdrawals. You may also be eligible for a tax deduction for your contributions to a 529 College Savings Plan. About 35 states offer income tax deductions for 529 College Savings Plans, but be certain to review and understand the rules for your particular state.

529 College Savings Plans come in two variations, savings and prepaid. The savings variety is looked after by the state or financial manager, and works similar to other investments such as mutual funds. The prepaid version will allow you to pay some or all of your child’s state school expenses, locking you into the current rate. A 529 College Savings Plan can be a great tool for college savings as long as you are aware of the deduction rules and limits in your state, contribution deadlines and restrictions involved with setting up the account.