Tax Tip of the Week
For the week of October 4, 2004

Get educated about Section 529 plans

If college costs are in your future, you should know about the benefits of Section 529 plans. They offer a tax-advantaged way to put away cash for college expenses or to prepay tuition expenses. Also known as College Savings Plans or Qualified Tuition Plans, they are now offered by every state and by many colleges.

• Earnings are tax-free. You can name anyone as the beneficiary of a 529 plan, although it’s often your child or grandchild. You then fund the plan with one or more contributions. There’s no upfront tax deduction for contributions, but earnings on investments in the plan are tax free. Withdrawals are not taxed provided they’re used for qualified higher education expenses. These include tuition, fees, required expenses for equipment and supplies, and sometimes room and board. You’ll generally pay taxes and a penalty on withdrawals used for other purposes.
    
• Investment choices. Investments in the plan are professionally managed, and often the investment choices become more conservative as the student approaches college age. Each plan has slight differences in contribution limits, fees, investment options, and other features.
    
• Plans differ. Because there are so many plans, you need to do your homework when choosing. For example, some state plans offer additional breaks on state income taxes for state residents. You should also carefully compare fees and investment options.

Contact our office to learn more about the tax benefits of these plans. We can also help you coordinate a Section 529 plan with other education tax breaks. 

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