Are you married? How many kids you and your partner plan to have?

It is never too early to consider your children’s education.

Well, you might have heard of the 529 plans.

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to help pay for K-12 and college education. It is named after section 529 of the Internal Revenue Code 26 U.S.C. § 529.

There are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state now has at least one 529 plan available for residents.

Prepaid tuition plans are only adopted in 10 states. Account owners can pay for tuition in advance at designated colleges and universities, locking in the cost at today’s rates.

College savings plans are much common among states. Savings plans can cover qualified expense include tuition, fees, room and board, and other related costs. Anyone can open a savings account in any states and send the student to any qualified college nationwide. The account holder contributes money to the account, which is generally invested in a selection of mutual funds.

As an account holder, you can choose the funds you like. How these funds perform will determine how the account grows (in some cases, shrink).

Tax advantages for a 529 plan

Account holders don’t need to pay federal and state income taxes for the earnings in a 529 plan, provided the money is used for qualifies education expenses. If not, a 10% penalty would be applied.

The money you contribute isn’t tax-deductible for federal income tax purposes. However, states have own policies. Different states provide different tax-advantage policies. In general, you have to invest in your home state’s plan if you want to enjoy tax-deduction or credit.

Conclusion

Student loan is a heavy burden in our life. A 529 plan can help ease the burden to some extent. What’s more, the money in a college savings plan is not only for your kids, but your relatives and even yourself. If your kids decide not to go to college, you can change the beneficiary on the account to siblings and cousins. A 529 plan gives you another choice on money management.

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