529 Plans are a type of investment account with tax advantages designed to off-set the cost of education. Like all investments they involve risk and do not guarantee a return. Here’s some helpful tips if you’ve decided to invest in a 529 Plan.
Pay attention to who gets withdrawals: Most 529 plans offer withdrawal choices that are paid to a parent, the student or the college. Although it might seem best to send withdrawals directly to the school, this could affect financial aid. Money paid to a parent or the student might trigger a tax-audit red flag. So you should keep detailed records matching money withdrawn to qualified education expenses. Talk to your Plan Administrator and Tax Accountant to make sure withdrawal checks are set up properly.
Only Use Funds for Qualified Expenses: You will get tax-free withdrawals for qualified education expenses such as: tuition, fees, books, supplies and equipment. Room and board also qualifies if the student attends college full-time or even half-time (the amount is limited by the school). Generally, it’s a bad idea to use a 529 account for emergency funds because you will get hit with a 10% penalty along with taxes for earnings.
Utilize 529 Gift Tax Exclusion: Typically, gifts for amounts up to $14,000 per year are not subject to a federal gift tax. 529 plan contributions are considered gifts according to tax law, but have more flexibility. Learn all you can about how to utilize this gift tax exclusion to save more for college.
Manage Funds and Scholarships Carefully: If your child gets a scholarship and doesn’t need all of the 529 funds, you might consider withdrawing the scholarship amount. Taking a scholarship-exception withdrawal might depend on how much money you have in the account, future expenses, and your other children. This type of withdrawal is taxed but you could avoid a 10% penalty for the scholarship amount. Ask your 529 Plan Administrator for details before making any account changes.
Withdrawal the Right Amount of Money: This is important because earnings are taxed if education expenses don’t match your 529 withdrawals. For example, if you take out an extra $3000 and you are in the 25% tax bracket you will owe $750 in taxes. When you determine withdrawal amounts be sure to calculate for scholarships and grants, not just tuition.
Start Sooner Rather Than Later: If you decide to start a 529 Plan for college savings then getting started as soon as possible is generally a good idea. Having a new child can be overwhelming, but don’t let that stop you from planning for their education. If your 529 Plan isn’t perfect at first you can change it later. Portfolio adjustments are allowed once a year.
Rebalance 529 Plan Accounts Yearly: Some 529 Plans have a pre-set portfolio option that rebalances automatically based on your child’s age. Ask your Account Administrator about this option. Investments will likely be determined by the amount of time before withdrawals are needed. Your risk tolerance could be higher if you have more time. Then you might want to adjust your portfolio as your child approaches college. Every year it’s a good ideas to review your account and make adjustments if necessary.
Contact: Titan Financial & Insurance Services
Sources: IRS.gov, CaliforniaColleges.gov, Quora
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