If you have a child or grandchild who will be heading to college soon, and you have set up and contributed to a 529 College Savings Plan, it’s almost time to tap into those funds.
The reason many people start tucking money aside in college savings plans when their children are young is any earnings grow tax-deferred in 529 plan accounts, and are federally tax-free (and often state tax-free) when withdrawn, as long as they’re used for qualified education expenses for a designated beneficiary. Qualified expenses include tuition, fees, books, and room and board.
Recently, Congress passed legislation that made computers, Internet access, printers, scanners, education-related software (no games), and other peripheral equipment qualified expenses. Computers were qualified expenses previously, as long as the college required computers for attendance. Now, they qualify even if the school does not require them.
According to Kiplinger’s, 529 plan savings can be used for room and board even if the account beneficiary lives off campus, as long as he or she is attending college at least half-time. While you don’t have to document expenses for 529 plan administrators, it’s a good idea to keep a record of all education-related expenses.
529 plans are a smart way to save and invest for college. Contributions may be state tax-free, and there is no limit to the amount you can contribute annually, according to SavingforCollege.com, but there are tax-related nuances to understand. During 2015, a parent or grandparent could contribute up to $14,000 per child or grandchild and qualify for annual gift tax exclusion ($28,000 if a spouse contributes, too.) If you prefer, you can make a lump-sum contribution of up to $70,000 per beneficiary, and spread it over five years for gift tax purposes.
To learn more about this college savings plan for your children or grandchildren, contact your financial professional.
* Please keep in mind, prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.
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