What are the tax benefits of a 529 plan?
Today's question: "What are the tax benefits of a 529 college savings plan?"
Answer: An IRS section 529 college savings plan is a state-run investment program that allow folks to save money for higher education in an account. The earnings in this account grow free of federal income tax and, when used to pay for qualified higher education expenses, may be withdrawn without having to pay federal taxes. It is potentially an extremely valuable tool for saving for college for you or your children.
Click here to read more about the 529 plan itself.
As far as federal tax benefits go, it's important to remember that 529 contributions themselves are not deductable from your yearly federal tax bill. BUT, after you make your contribution with after-tax dollars, your earnings in the 529 plan grow tax-deferred. So long as these dollars are used for qualified higher education expenses under IRS Code Section 529.
Examples of qualified expenses include tuition, some mandatory fees and books. A student's dorm/boarding expenses are also covered if they are enrolled at least half-time. Please read the previous link to the IRS page for more details on qualified expenses.
The earnings on withdrawals not used for qualified expenses may be subject to federal, state and local income taxes and possibly a 10 percent penalty.
On a final note, I won't address all of the drawbacks to 529 savings plans, but I do suggest doing research on what happens to your 529 account if a child decides not to pursue higher education or if they receive scholarships that cover their tuition and expenses. This is worthy of consideration.
Answer: An IRS section 529 college savings plan is a state-run investment program that allow folks to save money for higher education in an account. The earnings in this account grow free of federal income tax and, when used to pay for qualified higher education expenses, may be withdrawn without having to pay federal taxes. It is potentially an extremely valuable tool for saving for college for you or your children.
Click here to read more about the 529 plan itself.
As far as federal tax benefits go, it's important to remember that 529 contributions themselves are not deductable from your yearly federal tax bill. BUT, after you make your contribution with after-tax dollars, your earnings in the 529 plan grow tax-deferred. So long as these dollars are used for qualified higher education expenses under IRS Code Section 529.
Examples of qualified expenses include tuition, some mandatory fees and books. A student's dorm/boarding expenses are also covered if they are enrolled at least half-time. Please read the previous link to the IRS page for more details on qualified expenses.
The earnings on withdrawals not used for qualified expenses may be subject to federal, state and local income taxes and possibly a 10 percent penalty.
On a final note, I won't address all of the drawbacks to 529 savings plans, but I do suggest doing research on what happens to your 529 account if a child decides not to pursue higher education or if they receive scholarships that cover their tuition and expenses. This is worthy of consideration.
posted by Scott at
7:08 AM
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