Posted on February 18, 2010.
How to save for college and save taxes at a time Saving for college seems to be one of the most mysterious and fearsome in our financial life as it is almost impossible to guess what college costs will be 18 years from now, if you have a child born today. In fact, according to the college of your protege wants to participate, your best estimate should be "it will cost a lot." Saving as much as you can about the longest period of time will give you more options to choose from. The IRS has made it easier by allowing a special savings program designed to pay for future college costs known as a "plan of eligible tuition" or "529" plan, so named by the Article 529 of the Internal Revenue Code.
Withdrawals from the plan can be used for a student (also known as the beneficiary) to pay for "qualified higher education expenses" including tuition, room and board, books and computers, and other mandatory fees listed in the disclosure document of the plan. As long as the product is used for eligible college expenses, and IRS restrictions are followed, with gains in a 529 plan are not taxed federally. If money is withdrawn from these programs and not used for qualified education expenses, earnings will be subject to tax and an additional penalty of 10% federal tax.
Each U.S. state sponsors their own 529 plan, and each offers a minimum and maximum contribution. These programs are popular with wealthy grandparents as estate planning device because some states have plans with contribution limits in excess of $ 300,000 over the life of the plan. The IRS allows individuals to donate up to $ 12,000 - married couples up to $ 24,000 - per annum per person in 2008, which can be used to fund a 529 plan for a child or grandchild. In addition, you may be able to accelerate the plan contribute 5 years the amount of annual gift at a time. This means that a couple could contribute up to $ 120,000 a year per child, if the plan allows.
You can also move, or reversal, and states plan to another plan states as long as you adhere to the restrictions of each state. You do not have to choose a program in the state you or child for whom you save, however, live in, your state may provide economies of the state income tax. As a bonus, 10 states offer matching contributions for residents who contribute to the state 529 savings plan. These states currently include Colorado, Kansas, Louisiana, Maine, Michigan, Minnesota, New Jersey, North Dakota, Pennsylvania and Rhode Island. The match is limited to the amount of your contribution and income.
Beneficiaries of a 529 plan can attend an accredited college or university in the United States and some foreign institutions. Although four years of schooling can easily exceed $ 200,000 in some universities, I'm throwing in a "What if ..." here. What if you have more money in one of these programs you can pass on college fees? To avoid tax on federal income and state and include 10% penalty imposed by the IRS, you can change the beneficiary of the plan to another family member's beneficiary student's initial as a new future. Money can be withdrawn without adverse tax consequences as a result of receiving a scholarship from the student or the death or disability of the student.
Since there are so many rules and regulations regarding contributions, withdrawals, eligible expenses, residency requirements, tax implications, etc., and because there are so many investment options available in each state, I recommend that you consult your financial advisor or your tax advisor to determine if this type of college savings is tailored to your specific situation. There are many other options to choose to save money for your child or grandchild to come which may be less restrictive, even if y.
