529 plans are named after the section 529 of Internal Revenue Code 26 U.S.C. This is an investment plan that encourages saving for future higher education expenses. These are state-operated plans that provide a tax benefit. Your choice of school is not affected by the state your 529 plan is from.
Guidelines to help you in your 529 savings:
• Retirement savings comes first. The money you save for your child’s college education will count against you in financial aid awards, whereas retirement assets will not. So start putting aside money in your retirement account before starting a college fund.
• Past performance. College money should go to an index fund. Choosing savings based on past performance should be relegated to a taxable account where you can take a deduction for disasters.
• Allocations. A 529 plan offers an array of choices ranging from US stocks, foreign stocks and bonds. Instead of spending time and energy fussing over the allocation decision, experts recommend that you put 100% of the college fund into an all stock or all bond index fund. Adjust the retirement account to get the family’s overall asset allocation where you want it.
529 plans are usually categorized as prepaid or savings plan. The former lets you prepay all or part of the costs of an in-state public college education. 529 savings plan functions like 401K by investing your contribution in mutual funds.
Benefits of top rated 529 plan:
• Federal tax break – The reason that 529 plans are a success is that the earnings from this plan are federal tax-free and it will not be taxed when it is taken out to pay for college.
• State tax break – Over 30 states offer partial, or full tax deduction. If your state does not offer this benefit, feel free to choose any other state’s plan.
• Provides control – The donor of the account has complete access and legal rights to the funds; they can be withdrawn or used for other purposes (income tax and additional penalty apply).
• Low maintenance – This is a very easy way to save for college as automatic investments can be linked to your bank account or payroll deduction plans.
• Tax reporting made easy. Contributions made to a 529 plan need not be filed with your federal tax return – Deposits up to 28,000$ for married couples filing jointly will qualify for annual gift tax exclusion.
• Flexibility – The 529 plan allows the donor to change the investment options, change the beneficiary or roll over funds.
• Open to all – There is no income limit, age limit or annual contribution limit.