If you are like many of our clients, saving for your children’s or grandchildren’s education is a top priority. So what is the best way to begin?
A 529 account is a special kind of investment account that you can use to pay for a wide range of education expenses. Your savings in the plan will grow tax-deferred, and withdrawals are tax-free as long as they go to qualified expenses.
There are two types of 529 plans:
Savings plans are similar to Roth IRAs or Roth 401(k)s; you invest your after-tax contributions in investments like mutual funds, and then use that plan account to pay for qualified expenses for colleges and universities, as well as private, public or religious elementary or secondary tuition expenses for K-12 students. They’re the most common kind of 529 plan.
Prepaid tuition plans allow you to prepay for an in-state public school so you can lock in tuition rates for a student who might not actually attend the school for a few years.
529 plans can be also used to pay for qualified educational expenses like tuition and fees, books, computers, room and board, and special needs equipment for students attending a college or university. The IRS has also expanded qualified expenses to include K-12 tuition and student loan repayments too.
Note that you can also open a 529 plan for a family member–your children, grandchildren, or another relative. And you can transfer the plan to a different beneficiary if you want, as long as they’re related to you.
Every state offers at least one 529 plan option. You don’t have to invest in your state’s 529 plan, but it might offer extra tax savings if you do. There’s no limit to how much you can invest in a 529 plan every year, but many states cap the total amount you can contribute over a lifetime from $235,000 to $525,000.
If you have further questions about financial impacts do not hesitate to email us at email@example.com or call 248-733-4344.
The state where you reside or pay taxes may offer its own qualified state tuition program under Section 529 of the Internal Revenue Code with state tax advantages or other benefits exclusively for its residents or taxpayers. You should carefully review information about and consider such a plan, if any, as well as any tax advantages and benefits it offers before choosing to contribute to it or another 529 plan program. Depending on your state of residence, a particular 529 savings plan program might not afford you state tax benefits. As with all tax-related decisions, consult your tax advisor, 529 Plans are state-sponsored investment programs. Municipal fund securities are sold by offering statement, which is available from your registered representative. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. 529 Plans are state-sponsored investment programs. There is no guarantee by the issuing municipality or any government agency. There may be tax benefits and other advantages to plans offered by your resident state. You should consider the potential benefits (if any) offered to residents by your own state’s plan (if available) prior to considering another state’s plan. With very few exceptions, if withdrawals are made from a 529 Plan for purposes other than education, they are considered non-qualified withdrawals, and they are subject to federal - and possibly state - tax penalties. Specifically, the earnings portion of the non-qualified withdrawal will be included in the recipient’s gross income for federal tax purposes, the earnings will be subject to a 10% federal tax penalty, and in some states, additional state tax penalties may apply to the earnings. As with all tax-related decisions, consult with your tax advisor. Please note that assets in a 529 Plan could impact the beneficiary’s ability to qualify for grants and student loans. Annual asset charges for a 529 plan may be higher than corresponding share classes of underlying mutual funds.
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