COLLEGE SAVINGS 101

Savingforcollege.com

10 things we love most about 529 plans
http://www.savingforcollege.com/articles/10-things-we-love-most-about-529-plans-722

Posted: 2015-02-13

by Kathryn Flynn

According to a report released this week from technology company Greenwood Hall, 55 percent of college graduates believe that the value of a degree is worth less today than it was 10 to 15 years ago. Yet Bloomberg and Pew Research claim theyíre wrong, and we couldnít agree more. In fact, Pew released an analysis just last year that revealed Millennials with a four-year degree earned $17,500 more per year than those who only had a high school diploma. This earnings gap has nearly doubled in the last fifty years.

Itís no surprise that as the value of a degree rises, so does the price. Getting to college without going into excessive debt isnít easy, but itís also not impossible. Here are 10 reasons why we think 529 plans are the most effective way for families to save for college.

1. Federal Tax Benefits

  • In a 529 plan, earnings grow federal tax-free and avoid being taxed when the money is taken out to pay for college.
  • Other savings vehicles, such as mutual funds, will give up a portion of their earnings to annual income taxes and also get hit with a capital gains tax at withdrawal.
  • This has been a huge incentive for Americans to save for college. Since the tax benefits were made permanent by the Bush tax cuts in 2001, total assets in 529 plans have risen by over $200 billion.

529 plans and their tax benefits are here to stay

Photo credit: Can Stock Photo

2. State Tax Benefits

  • In addition to the federal tax savings, 34 states, including the District of Columbia, currently offer residents a full or partial tax deduction 529 plan contributions.
  • Residents of Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania can use any stateís 529 plan, but the rest must invest with their home stateís plan to be eligible for a benefit.
  • Itís never too late - you generally can claim your state tax benefit no matter how long the money has been in your 529 account, so itís a smart idea to continue contributing until youíve paid your last tuition bill.

Find 529 plans in your state

Photo credit: Can Stock Photo

3. You can invest in almost ANY stateís plan

  • This is true no matter what state you live in.
  • You should always start by looking at your home stateís plan in case it offers a tax break for residents.
  • Yet even if your home state offers a tax deduction, you might still want to shop around if high fees or poor investment performance are outweighing the benefit.

Compare 529 plans

Photo credit: Can Stock Photo

4. You can save for just about any type of college

  • 529 funds can be withdrawn tax-free to pay for almost any post-secondary education.
  • This includes traditional universities, community colleges, vocational schools and even some foreign universities.
  • 529 beneficiaries do not have to attend college in the state where their 529 plan is based.

5 types of students who benefit 529 plans

Photo credit: Can Stock Photo

5. Flexibility

  • In most cases, a 10% penalty fee along with income tax will be applied to 529 withdrawals spent on non-qualified purchases.
  • There are special exceptions to the penalty in the case of the beneficiaryís death or disability, or when they earn a scholarship or decide to attend a U.S. Military Academy.
  • If the original beneficiary decides not to go to college or just doesnít use all of the funds, you can always change the beneficiary to another relative who is planning to attend college.

Common 529 plan misconceptions

Photo credit: Can Stock Photo

6. No income limits

  • Unlike other popular savings vehicles used to save for college, you can invest with a 529 plan no matter what your household income is.
  • Married couples filing jointly must have an income less than $181,000 to contribute the maximum amount to a Roth IRA.
  • To contribute the maximum amount to a Coverdell ESA, married couples filing jointly must have annual income less than $220,000.

Compare savings options

Photo credit: Can Stock Photo

7. No annual contribution limits

  • Contributions up to $14,000 per individual qualify for the annual gift tax exclusion.
  • Those looking to give a larger amount can utilize as much as $70,000 in annual gift tax exclusions when they elect to treat the contribution as if it were made over a five-year period.
  • There are limits to the amount you can contribute over the entire life of a 529 plan, which vary by state, ranging from $235,000 to over $400,000.

10 rules for superfunding a 529 plan

Photo credit: Can Stock Photo

8. Simplicity

  • To enroll in a plan, simply visit the planís website or contact your financial advisor.
  • Most plans allow you to ďset it and forget itĒ with automatic investment plans that link to your bank account, or payroll deduction plans.
  • With many plans, minimum contributions are as low as $25 per month when you sign up for automatic deposits.

[PODCAST] Getting started with a 529 plan

Photo credit: Can Stock Photo

9. Low fees

  • 529 plans have been growing in recent years, causing plan management fees as a percentage of assets to decline.
  • Fees have also been dropping as a result of investment companies competing for the right to manage the funds in 529 plans.
  • Whatís more, many direct-sold plans are made up of passively managed index funds, which tend to have much lower expense ratios than actively managed funds.

Find the lowest-cost 529 plan

Photo credit: Can Stock Photo

10. Smart choice for financial aid

  • Assets in a 529 plan owned by a student or their parent are considered parental assets, which have less of an impact on financial aid eligibility than student assets or income.
  • Funds withdrawn from these 529 plans to pay for college are not counted as income on the following yearís FAFSA.
  • But this is not true for Roth IRAs or grandparent-owned 529 plans. While assets in these accounts will not be counted on the FAFSA, when money is withdrawn to pay for college will be included with the studentís base-year income.

How 7 different assets can affect your financial aid eligibility

Photo credit: Can Stock Photo

According to a report released this week from technology company Greenwood Hall, 55 percent of college graduates believe that the value of a degree is worth less today than it was 10 to 15 years ago. Yet Bloomberg and Pew Research claim theyíre wrong, and we couldnít agree more. In fact, Pew released an analysis just last year that revealed Millennials with a four-year degree earned $17,500 more per year than those who only had a high school diploma. This earnings gap has nearly doubled in the last fifty years.

Itís no surprise that as the value of a degree rises, so does the price. Getting to college without going into excessive debt isnít easy, but itís also not impossible. Here are 10 reasons why we think 529 plans are the most effective way for families to save for college.

1. Federal Tax Benefits

  • In a 529 plan, earnings grow federal tax-free and avoid being taxed when the money is taken out to pay for college.
  • Other savings vehicles, such as mutual funds, will give up a portion of their earnings to annual income taxes and also get hit with a capital gains tax at withdrawal.
  • This has been a huge incentive for Americans to save for college. Since the tax benefits were made permanent by the Bush tax cuts in 2001, total assets in 529 plans have risen by over $200 billion.

529 plans and their tax benefits are here to stay

Photo credit: Can Stock Photo

2. State Tax Benefits

  • In addition to the federal tax savings, 34 states, including the District of Columbia, currently offer residents a full or partial tax deduction 529 plan contributions.
  • Residents of Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania can use any stateís 529 plan, but the rest must invest with their home stateís plan to be eligible for a benefit.
  • Itís never too late - you generally can claim your state tax benefit no matter how long the money has been in your 529 account, so itís a smart idea to continue contributing until youíve paid your last tuition bill.

Find 529 plans in your state

Photo credit: Can Stock Photo

3. You can invest in almost ANY stateís plan

  • This is true no matter what state you live in.
  • You should always start by looking at your home stateís plan in case it offers a tax break for residents.
  • Yet even if your home state offers a tax deduction, you might still want to shop around if high fees or poor investment performance are outweighing the benefit.

Compare 529 plans

Photo credit: Can Stock Photo

4. You can save for just about any type of college

  • 529 funds can be withdrawn tax-free to pay for almost any post-secondary education.
  • This includes traditional universities, community colleges, vocational schools and even some foreign universities.
  • 529 beneficiaries do not have to attend college in the state where their 529 plan is based.

5 types of students who benefit 529 plans

Photo credit: Can Stock Photo

5. Flexibility

  • In most cases, a 10% penalty fee along with income tax will be applied to 529 withdrawals spent on non-qualified purchases.
  • There are special exceptions to the penalty in the case of the beneficiaryís death or disability, or when they earn a scholarship or decide to attend a U.S. Military Academy.
  • If the original beneficiary decides not to go to college or just doesnít use all of the funds, you can always change the beneficiary to another relative who is planning to attend college.

Common 529 plan misconceptions

Photo credit: Can Stock Photo

6. No income limits

  • Unlike other popular savings vehicles used to save for college, you can invest with a 529 plan no matter what your household income is.
  • Married couples filing jointly must have an income less than $181,000 to contribute the maximum amount to a Roth IRA.
  • To contribute the maximum amount to a Coverdell ESA, married couples filing jointly must have annual income less than $220,000.

Compare savings options

Photo credit: Can Stock Photo

7. No annual contribution limits

  • Contributions up to $14,000 per individual qualify for the annual gift tax exclusion.
  • Those looking to give a larger amount can utilize as much as $70,000 in annual gift tax exclusions when they elect to treat the contribution as if it were made over a five-year period.
  • There are limits to the amount you can contribute over the entire life of a 529 plan, which vary by state, ranging from $235,000 to over $400,000.

10 rules for superfunding a 529 plan

Photo credit: Can Stock Photo

8. Simplicity

  • To enroll in a plan, simply visit the planís website or contact your financial advisor.
  • Most plans allow you to ďset it and forget itĒ with automatic investment plans that link to your bank account, or payroll deduction plans.
  • With many plans, minimum contributions are as low as $25 per month when you sign up for automatic deposits.

[PODCAST] Getting started with a 529 plan

Photo credit: Can Stock Photo

9. Low fees

  • 529 plans have been growing in recent years, causing plan management fees as a percentage of assets to decline.
  • Fees have also been dropping as a result of investment companies competing for the right to manage the funds in 529 plans.
  • Whatís more, many direct-sold plans are made up of passively managed index funds, which tend to have much lower expense ratios than actively managed funds.

Find the lowest-cost 529 plan

Photo credit: Can Stock Photo

10. Smart choice for financial aid

  • Assets in a 529 plan owned by a student or their parent are considered parental assets, which have less of an impact on financial aid eligibility than student assets or income.
  • Funds withdrawn from these 529 plans to pay for college are not counted as income on the following yearís FAFSA.
  • But this is not true for Roth IRAs or grandparent-owned 529 plans. While assets in these accounts will not be counted on the FAFSA, when money is withdrawn to pay for college will be included with the studentís base-year income.

How 7 different assets can affect your financial aid eligibility

Photo credit: Can Stock Photo

 

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