One of the most popular ways to save for college is with a Section 529 plan. These plans offer a great combination of flexibility and tax benefits.
Until recently, the tax benefits were scheduled to expire after 2010. But this year's Pension Protection Act made the benefits permanent, removing some concerns.
In a Section 529 college savings plan, you contribute after-tax dollars, which are invested in a selection of mutual funds. The investments grow tax-free, and withdrawals are free of tax if they are used for qualified expenses. These include not only tuition, but also expenses for room and board, books, and equipment.
Among the reasons these plans are so popular are the following:
- You can save up to $250,000 or sometimes more, depending on the plan.
- Anyone can contribute, not only parents. Making a contribution can be a great gift idea for grandparents, for example. There are no income limits on the contributor, as there are with Coverdell education savings accounts.
- You have control over invested funds, which are professionally managed.
- Contributions may qualify for a state income tax deduction in some states.
- If the named beneficiary does not attend college, it is relatively easy to switch benefits to another student in the family.
Another kind of Section 529 plan allows you to prepay tuition costs at today's rates. You are generally limited to a specified group of colleges, however.
For more information about the tax benefits of either type of plan, please contact our office.
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