Now that another school year is drawing to a close, your young children are a step closer to the day when they’ll be heading off to college. Of course, as you’re probably aware, higher education doesn’t come cheap — and the costs seem to continuously climb. You can help your children — or even your grandchildren — meet these expenses by investing in a 529 plan. And this college savings vehicle offers estate-planning benefits.
As a college funding vehicle, a 529 plan offers some significant benefits. When you contribute to a 529 plan, your earnings accumulate tax free, provided they are used for qualified higher education expenses. (Keep in mind, though, that 529 plan distributions not used for qualified expenses may be subject to federal and state income tax and a 10% IRS penalty.) Furthermore, your 529 plan contributions may be deductible from your state taxes. However, 529 plans vary, so be sure to check with your tax advisor. And the lifetime contribution limits for 529 plans are quite generous; while these limits vary by state, many plans allow contributions well in excess of $200,000. Plus, a 529 plan is flexible: If the child, grandchild or other beneficiary decides against college, you can transfer the unused funds to someone else, tax and penalty free.