College Savings Plans
Your children or grandchildren may be tiny tots today, but they’ll be off to college before you can say “Where’s the money coming from?” If your long-term investment goals include financing a child’s education, contributing to a tax-advantaged college savings plan can help you go to the head of the class. Qualified tuition programs — also called Section 529 plans — come in two varieties: prepaid tuition plans and college savings plans. Most states offer one or both types of plans. But you aren’t limited to investing in a plan offered by your home state. Investment options vary with each plan, so you may want to check out several before you make a decision.
How They Differ
Prepaid tuition plans allow you to “lock in” today’s tuition rates at eligible public colleges and universities in the state sponsoring the plan. College savings plans allow you to contribute to an investment account set up to pay qualified education expenses at any eligible educational institution. If you want, you can invest in both types of plans for the same child. With college savings plans, you’ll typically have a choice of investment options that present varying degrees of risk. As with any investment, your returns may fluctuate with market ups and downs, which, in turn, will affect the value of your account.
Tax-Friendly
Savings plan contributions are made with after-tax dollars. All investment earnings are exempt from federal tax when the funds are used to pay qualified higher education expenses. Certain state tax exemptions may apply as well. Assets may be transferred between state plans once every twelve months — or more often if the account beneficiary changes. Funds may be used to pay for qualified expenses, such as tuition; room and board; and the costs of books, fees, supplies, and equipment, at U.S. colleges and universities, vocational schools, or other accredited postsecondary educational institutions.
More Good News
States set their own maximum contribution limits for college savings plans. Most state plans have limits exceeding $200,000. There are no income restrictions for making contributions to Section 529 plans, and assets that aren’t used by the intended beneficiary may be transferred without penalty to another family member. Keep in mind, however, that Section 529 savings plan investments may impact a student’s eligibility for financial aid. We can help you choose a Section 529 plan to meet your child’s or grandchild’s future educational needs.