What you should know about saving for college with a 529 Plan
Helping your child decide where to go to college can be confusing, but understanding your investment options to help pay for it doesn’t have to be. Some simple knowledge about savings plans can help make the process easier. A 529 Plan is one of the safest and most flexible ways to save. The following information can help you clear up some common misconceptions about 529 Plans.
Short term investments aren’t worth it
Some people feel that if their child is going to school in the next few years, or if they themselves are interested in continuing their education in the near future, that a 529 Plan is pointless. This is not the case.
“While it is true that there’s not much opportunity for the money saved in a tax-advantaged investment account to grow if the money is only in there for a year, it’s a myth that there’s no point in adults saving for their own education to put money into a 529 plan,” according to the U.S. News & World Report. “Savers who want to start school in the fall of 2015 should start saving before the fall semester this year.”
Be sure to carefully review the withdrawal guidelines and minimums of a plan before you begin investing. When you find one that meets your needs, you can begin reaping the benefits right away.
“We have a $1,000 tax credit that can be taken right off their income tax,” states Jodi Golden, executive director of the Indiana Education Savings Authority, which has a College Choice Direct 529 Plan that only requires money stay in the plan for 12 months.
There are restrictions imposed by which state the plan comes from
Although many people choose the 529 Plan offered by their own state, you may actually use any state’s plan. The reason so many people pick their home state’s plan is because it can offer more tax benefits.
“Many states give you a state income tax break if you use the plan offered by your home state,” states Dan Danford, CEO of Family Investment Center. “If you don’t like the plan your state offers, you may not get the state income tax breaks, but you still get all the benefits of tax-free accumulation and withdrawals.”
There is one other common myth regarding the flexibility of state plans. Some people are aware that they can choose another state’s plan, but believe that their child must then go to school in that state. Fortunately, your child can go to school wherever they desire, and you can choose a plan from whichever state you prefer.
“There is no restriction or requirement to use 529 assets for a school (in a state) in which the taxpayer or beneficiary resides,” says Mary McConnell, director of college savings products for Charles Schwab in San Francisco.” People can use that money for qualified expenses for any school that’s been accredited for financial aid, and that includes many international programs.”
You can’t change beneficiaries
Many people are worried that they will be penalized for changing beneficiaries if one child decides not to go to college. This may inhibit parents from starting to save early, which is the best way to save. Investors can rest assured, however, because there are no tax penalties for changing beneficiaries.
“While there are tax penalties for taking out money from 529 plans to pay for things that are not considered qualified education expenses, there isn’t a tax penalty for changing the beneficiary,” according to the U.S. News & World Report. “Adults who own an account for a college-age student can change the beneficiary to themselves, especially if the student has finished college.”
You lose control of your investment
Some people may be wary of investing in a 529 plan because they do not want to give up control of the money they have saved for their child to attend college. After working so hard to save, many parents are afraid that their student will use the money unwisely, so they hold onto their funds in their own savings account. The fact of the matter is, however, that you can stay in control of the distributions.
“Each account has an owner (or joint owners) and that person controls the assets, regardless of how many people contribute,” according to Kiplinger. “The owner doesn’t have to be a parent.”
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