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529 College Savings Plans

Since their creation in 1996, 529 plans have become to college savings what 401(k) plans are to retirement savings — an indispensable tool for helping you amass money for your child's or grandchild's college education. That's because 529 plans offer a unique combination of benefits unmatched by other savings vehicles.

 

There are two types of 529 plans: college savings plans and prepaid tuition plans. Though each is governed under Section 529 of the Internal Revenue Code (hence the name "529" plans), college savings plans and prepaid tuition plans are very different savings vehicles. There are typically fees associated with opening and maintaining each type of account.

 

A 529 college savings plan is a tax-advantaged vehicle that lets you save money for college in an individual investment account. Some plans let you enroll directly, while others require that you go through a provider of professional financial services like Hocking Valley Financial Solutions.

 

The details of college savings plans vary by state, but the basics are the same. You'll need to fill out an application where you'll name a beneficiary and select one or more of the plan's investment portfolios to which your contributions will be allocated. Also, you'll typically be required to make an initial minimum contribution that must be in cash.

 

College savings plans offer a unique combination of features that no other college savings vehicle can match:

 

  • Federal tax advantages. Contributions to your account grow tax-deferred and are completely tax-free if the money is used to pay the beneficiary's qualified education expenses. The earnings portion of any withdrawal not used for college expenses is taxed at the recipient's rate and subject to a 10% federal penalty.

 

  • State tax advantages. Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals. However, be aware that some states limit their tax deduction to contributions made to the in-state 529 plan only.

 

  • High contribution limits. Most college savings plans have lifetime maximum contribution limits that exceed $300,000.

 

  • Unlimited participation. Anyone can open a 529 college savings plan account, regardless of income level.

 

  • Professional money management. College savings plans are managed by designated financial companies that are responsible for managing the plan's underlying investment portfolios.

 

  • Flexibility. Under federal rules, you can change the beneficiary of your account to a qualified family member at any time without penalty. You also can roll over the money in your account to a different 529 plan once per year without income tax or penalty implications.

 

  • Wide use of funds. Money in a 529 college savings plan can be used at any college in the United States or abroad that's accredited by the U.S. Department of Education and, depending on the individual plan, it also can be used for graduate school.

 

  • Accelerated gifting. 529 plans offer an excellent estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren's college education. Individuals can make a lump-sum gift to a 529 plan and avoid the federal gift tax, provided a special election is made to treat the gift as having been made in equal installments across a five-year period and no other gifts are made to that beneficiary during the five years.

 

  • Variety. Currently, there are more than 50 different college savings plans to choose from because many states offer more than one plan. You can join any state's college savings plan.

 

However, college savings plans have drawbacks, too. For example, you relinquish some control of your money. Also, returns aren't guaranteed — you roll the dice with the investment portfolios you've chosen, and your account may gain or lose money.

 

Note: Investors should consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. Hocking Valley Financial Solutions can help you with this process.

 

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