Wednesday, April 29, 2015
Investing in a 529 plan, a college savings account exempt from federal taxes, could help alleviate some of the financial stressors that surround funding a college education. Below are six tax rules you should consider before investing in a 529 plan:
- Contributions are not deductible. While some states do allow deductions, the money is not deductible on Federal taxes; however, there may be other tax credits available.
- Contributions are made with after-tax dollars. The growth on your investment is not taxed so long as it is used for qualifying education expenses.
- Higher taxes for non-educational use. A ten percent penalty will be assessed to any money taken from a 529 plan that is not used for higher education.
- The beneficiary can be changed. If you create a 529 plan for one child and the money is not used, it can be rolled into a 529 account for another child without a tax penalty.
- Funds available for vocational training. For 529 plans, the tax benefit extends to money used at vocational and technical training, not just colleges and universities.
- Contribution limits. Contributions are subject to gift-tax limits of $14,000 a year. A larger amount can be treated as a contribution over a five-year period for tax purposes.
See Karen Ridder, 6 Tax Rules for 529 Plans You Should Know, Newsmax, Apr. 28, 2015.