Let’s take a look at a financial topic on the minds of many Americans, especially those with children or grandchildren – how to save for education costs.
You see, there are two facts about a college education that most parents and grandparents understand only too well. First, college is increasingly becoming a prerequisite for success. College graduates earn nearly twice as much as those with only a high school diploma.
Secondly, college can, to say the least, be an expensive proposition. Over the past ten years, the average total cost of college has risen more than twice as fast as the consumer price index.
So, if you want to help a child or grandchild save for college, what are your options? While there are many college savings strategies available, 529 plans offer many unique advantages.
529 Plans offer a flexible, tax advantaged way to save for a child’s college education.
They offer federal and in some cases state income tax advantages that help make it possible to grow your college savings faster than in a taxable account. For example, if you are an Arkansas resident and you open an Arkansas approved 529 plan account, you may qualify for state income tax deductions for deposits to the 529 account. Also, you pay no taxes on earnings while your money remains in a 529 account.
When your child or grandchild is ready to enter college, withdrawals are exempt from federal income taxes when used for qualified higher education expenses such as tuition, fees, certain room and board costs and supplies.
Parents and grandparents can make contributions to a 529 plan account. Your gifts to the account can help reduce your gross estate under current estate and gift tax rules.
As owner of the account, you remain in control of the funds and determine when and how the money actually gets spent.
If the designated child does not need all the money for their education, you can change the beneficiary and use the money for a different child or other family member.
Furthermore, if you need the money for some other purpose, you can withdraw some or all of the balance at any time. However, if you withdraw money for a purpose other than educational expenses, the withdrawal may be subject to income taxes and in some cases penalties as well.
529 plans are not the only college savings option, but they are a good option to consider for many families. Check out the Financial Briefing video “What You Need to Know about 529 College Savings Plans”) in the Online Resources section of my website www.thefinancialbriefing.com