Paying for your children's college can be stressful, especially for those who don't plan ahead. Investing in a 529 plan, a college savings account that is exempt from federal taxes, could help alleviate some of the financial burden that comes with paying for college.
Here are six tax rules you should consider before investing in a 529 plan:
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1. Most 529 plan contributions are not deductible:
Some states do allow deductions, but the money is not deductible on Federal taxes. However, there may be other tax credits available when it comes time to spend the money, according to the IRS.
2. 529 plan contributions are made with after-tax dollars:
The tax advantage of a 529 plan is that the growth on your investment is not taxed as long as it is used for qualifying education expenses.
3. A higher tax applies if the money is not used for education: The U.S. Securities and Trade Commission reports
that income tax, as well as a 10 percent tax penalty will be assessed to any money taken from a 529 plan that is not used for higher education.
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4. The beneficiary of the money CAN be changed without penalty:
If you set up a 529 plan for one child and the money is not used by that child, it can be rolled into a 529 account for another child without a tax penalty.
5. The money can be used for vocational training:
Any school that is eligible to receive money from federally funded student aid programs can be a "qualified institution" for 529 plan expenses, according to the IRS. That means the tax benefit extends to money used at vocational and technical training, as well as college and university degrees.
6. There are contribution limits:
Contributions to 529 plans can be made by any person for any beneficiary. However, contributions are subject to gift-tax limits of $14,000 a year. A larger amount can be made at one time and treated as a contribution over a five-year period for tax purposes.
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