Note: New tax rules that went into effect on
January 1, 2018, so you can now use a 529 plan to pay kindergarten through high
school tuition expenses.
One of my favorite ways to save for a child’s college is the
529 college savings plan. A 529 plan works a lot like a retirement account, in
that you can contribute to it, pick investments and watch it grow. The account
grows and is spent tax free as long as the money is used for qualified school
expenses. According the IRS you can contribute up to $14,000 a year to avoid
gift tax.
A 529 is a state plan and you can open one up in any state regardless
of whether you live there or not. The money can then be used at any college. To
make it easier to understand, you can live in Texas, open a 529 in Utah’s state
plan and your child could use the money to attend college in California. Now,
if you pay state income tax look at your tax rules for claiming 529
contributions on your taxes. You may receive a tax break for contributing to a
529 plan. Just make sure you read the information carefully as your state may
require you to invest in your state’s plan to receive the tax break but many do
not. If you need help figuring out which state has the best plan for you, Clark Howard actually researched every state’s plan and compiled a list of his Deans
List and Honor roll plans.
When you open the 529 plan, you open it in your name with
your child as the beneficiary. If for
some reason your child decides not to go to college or qualified trade school
you cannot withdraw the money without a 10% penalty and paying taxes on that
money at your current tax bracket for not using the money for qualified school
expenses. But, there is a way around that by changing the beneficiary so that
the money can be used by another child.
If you invest just $200 a month in a 529 plan from the time
your child is born, and continue for 17 years you will have $86,935.18 to use
for college if you average 8% annual return.
Monthly Deposit
|
Years
|
Interest Rate
|
Principal Deposit
|
Interest Earned
|
Maturity Total
|
$200
|
17
|
8%
|
$40,800
|
$46,135.18
|
$86,935.18
|
$300
|
17
|
8%
|
$61,200
|
$69,202.77
|
$130,402.77
|
Remember do not stop or lower contributions to your own
retirement account to fund your child’s college. You can receive a loan for
just about anything (car, house, college, etc.) but there are no loans for
retirement.
https://www.irs.gov/newsroom/529-plans-questions-and-answers
https://clark.com/education/clarks-529-plan-guide/
https://www.irs.gov/newsroom/529-plans-questions-and-answers
https://clark.com/education/clarks-529-plan-guide/
Ms. Smart
