Preparing for college is a massive undertaking for parents. From preparing your children to take their entrance exams and navigating the college admissions process, remembering to save enough money for tuition can easily escape your mind. While you have professional college admissions coaches for the former, we’re here to help with the latter! For many, there are only 2 obvious options for shouldering this big expense: either pay out of pocket or take out student loans. But there are more than just those options, like a 529 College Savings Plan for example. At Pro Vision Wealth, we help you plan for the future by helping you with your tax strategies and lifelong wealth strategies. Before you pay for college, consider using a college savings plan to its full advantage.
What is a 529 College Savings Plan?
529 plan accounts are investment vehicles that allow you to save money for your child’s college education. You can open an account with any state or private college savings plan and then contribute money over time to it. The money you put into these accounts grows tax-free and can be withdrawn at any time for qualified expenses for the beneficiary of the account.
What Qualifies as a Qualified Expense?
Qualified expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution that participates in the program. Room and board can also be included if the student is enrolled at least half-time in a degree program. Transportation costs are limited to $10,000 per year per student.
529 Plan Accounts Grow Tax-Free
A 529 plan is a type of savings account that allows parents to set aside money for their children’s future education costs without having to pay taxes on the earnings. There are no federal tax deductions available with a 529 plan, but many states offer incentives in the form of state tax deductions or credits.
You can withdraw money from your 529 plan account at any time without penalty, but if you withdraw funds within 12 months of contributing them, the earnings will be taxed as ordinary income and will be subject to an additional 10 percent penalty. If your child receives scholarships or grants that cover all qualified educational expenses for an academic year, you can use those funds to repay yourself for any contributions made during that year without incurring any penalties or taxes.
There are no federal 529 tax deductions
There are no federal 529 tax deductions, but that doesn’t mean you can’t use your state’s tax deduction to reduce your taxable income. In fact, if you save in a 529 plan and then withdraw the funds for qualified education expenses, you may be able to deduct some of your annual contributions from your gross income on your state’s taxes.