To encourage college savings, Section 529 of the Internal Revenue Code authorizes tax-free earnings on 529 college savings plans. So if you don’t have one already for your college-bound loved ones, yourself included, get the facts and get on board.
Are 529 college savings plans really tax free?
While you are required to pay taxes on the income before you deposit it into one of these education savings plans, you pay no taxes upon withdrawal, meaning all earnings are, indeed, tax free.
Do tax-free earnings apply to both federal and state taxes?
Earnings on 529 college savings plans are always federal tax-free (provided the money is used for qualifying expenses). But state tax benefits vary by state.
What expenses are covered by a 529 college savings plan?
Qualifying expenses include tuition, room and board (including off-campus housing, provided you are enrolled in a degree program at least half-time), books, fees, supplies, and required equipment. However, if you withdraw and use the money for any other non-qualifying expense, you will be taxed.
Who can open a 529 college savings plan?
You can do it for yourself. You can do it for your kids. You can do it for anyone.
What if the beneficiary of the plan decides not to go to college?
You can transfer it to someone else.
How do I sign up for a 529 college savings plan?
Shop around. Every state has its own 529 college savings plan. However, that doesn’t mean you have to open one in your state. Sure, you can start with a good look at your state’s plan first, but be sure to check out all your options.
How much do I have to have to open a 529 college savings plan?
It depends on the state, but some have minimums as low as $25 to start.
What if I open a plan in one state then realize I want to switch to a different state?
You can transfer that, too, but only once a year.
Do all states have 529 college savings plans?
No. While most states offer college savings plans, some offer prepaid tuition plans instead.
What is a prepaid tuition plan?
A prepaid tuition plan is a type of 529 plan. Basically, what you’re doing with this plan is purchasing college credits for the future, for the price of tuition today. However, this prepaid option typically only covers tuition at in-state colleges. With a college savings plan, on the other hand, the money can be used for attending any qualifying public or private school, including foreign universities.
When is the best time to open a 529 college savings plan?
The best time is always now. However, many states do offer special incentives on 5/29 of every year – 529 College Savings Day. Here’s a look at some of them in 2016.
When can I can make withdrawals?
You need to make your withdrawals the same year the money will be used.
How do I handle things come tax time?
Every year that you make a withdrawal, you will receive a form 1099-Q reporting the distribution. You’re then tasked with determining how much of what you withdrew was used for qualifying expenses. That’s why it’s so important that you keep good expense records. Learn more about the importance documentation.