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Can Three Figures Be Enough to Help Pay for College? Maybe, If Those Figures Are 5-2-9

With another academic year now underway, a lot of families may be looking toward the future and asking a few questions: I wonder if my kids will go to college? I wonder where? And, perhaps most of all: I wonder how I’ll pay for it?

Even if you don’t know the answer to the first two questions, you can begin working on the answer to the third. A 529 plan offers a tax-advantaged way to put money away for a child or grandchild to help pay for their education.

Every state now offers a 529 plan, and you do not have to use your state’s plan to get the benefits. You can go to a school in any state, not just the state where you have the plan.

Although there is no federal tax deduction for money contributed to a 529 plan, the growth of those funds is free of federal income tax. As long as distributions are used to pay for the beneficiary’s education, withdrawals are tax free. Some states, such as Pennsylvania, offer a deduction for contributions to 529 plans. New Jersey offers no deduction, and Maryland offers limited deductions.

The younger the child, the greater the impact of tax-free compounding. You need to set up a separate account for each beneficiary. Money contributed is treated as a gift. However, the gift qualifies for the annual gift tax exemption, which is currently $13,000. There is a special provision that allows you to contribute up to 5 years’ worth of gifts, or $65,000, in one year. A husband and wife could do a total of $26,000 or up to $130,000.

You, the donor, remain in control of the account. You decide how much is used each year once withdrawals are made for education. Also, if the beneficiary does not need any or all of the money, funds can be used to pay for educational costs for another qualifying family member.  Many plans also give you the option to reclaim the money, although you will have to pay income tax on the earnings plus a 10% penalty.

This offers just a brief introduction to the opportunities that 529 plans offer for funding education. Each state’s plan is a little different, and it pays to evaluate them and compare to find the one that’s right for your needs. To obtain much more information about the 529 plan and get details on each state’s plan, go to www.savingforcollege.com.

Have you used a 529 plan to save for a child’s education, or your own? What tips do you have?

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