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7 Reasons to Open a 529 College Savings Account

February 23, 2012 | Comments: 0 | Views: 129

529 College Savings Plans, or Qualified Tuition Programs, have been around since 1996 and have been growing in popularity ever since. Here are a few of the reasons you ought to consider before opening a 529 account to help pay for your child or grandchild's college education.

1. Tax Advantages - One of the biggest reasons to open a 529 account is Federal taxes are deferred on the account earnings and as long as the disbursements are used for qualified educational expenses, they are Federal tax-free, as well.

There may also be tax benefits offered by your state. In most states, as with Federal, the account earnings will grow tax deferred and will also be state tax-free when used for approved expenses.

Additionally, many states also offer a yearly state tax deduction for 529 plan contributions. These vary from state to state, so you will need to check with your state's 529 website for details. Some, like Ohio and Rhode Island, even allow a carryover of excess contributions to future years.

Should you be fortunate enough to be able to donate a larger sum of money, the contribution can qualify for the annual $13,000 gift tax exclusion. If you donate up to $65,000 in a year, you can even treat it as spread over five years for gift tax exclusion purposes.

2. Many Investment Choices - In most states, when you choose to invest in a 529 account, you will have many investment possibilities. While they vary from plan to plan, you will probably be able to find suitable portfolios whether you are conservative, moderate or aggressive in your investment style. Many states have age-based funds that will automatically move your money as the beneficiary grows older, so you don't need to make any decisions after the initial choice. Of course, there are also manual portfolios that do not change over time unless you decide to move the funds.

3. You Control the Money - Even though you name a beneficiary when you create the 529 savings account, the account owner keeps control of the money. You decide when the money is distributed and for what purpose. You can change the beneficiary and even can withdraw the funds from the account for any reason you wish (as long as you are willing to take on the tax consequences).

4. Use Any State's 529 Program - You can open a 529 account in any state, so if you live in Illinois, but like the investment choices in the Oregon 529, feel free to open an account in Oregon. Pay attention though, once you stray from your home state, you may be giving up tax advantages. In the above example, for instance, you would be giving up as much as a $10,000 yearly deduction from your Illinois state taxes ($20,000 if married filing jointly). If you live in a state where there is no state income tax or that doesn't offer a state tax deduction for 529 contributions, checking out the plans of other states may make sense.

5. Attend Any School - Unless you are invested in one of the prepaid tuition programs, you will be able to use the 529 funds at any accredited institution of higher education across the country or even some internationally. If you are in a prepaid tuition program, your choices will be more limited. While you may be able to use the proceeds at private or out-of-state schools, it's likely that you won't get the full value. You will need to check with the state where you opened the 529 account.

6. Change Beneficiary if Necessary - So you opened a 529 for your grandchild and as they approached 18, it became obvious that they would not be going on to college. Fortunately, with a 529, this may not present a big problem. You can change the beneficiary to another family member (another grandchild, your children, or even yourself) and retain all the benefits of the 529. Should you not want to do this, you still have the option of taking the funds out of the account, though there would likely be significant tax obligations if you do.

7. Low Fees - One of the benefits of investing through these state run plans is that in most cases, the state treasurers have negotiated down the management and administrative fees to a very low level. However, the fees do vary from state to state and even from plan to plan, so make sure you check the fees when comparing 529 plans.

All in all, 529 programs offer large advantages when compared to other methods of saving for college such as Coverdell ESA's or UTMA's. Open a 529 account as early as possible to take advantage of the compounding effect on your returns. Check with your financial advisor to ensure the 529 is your best choice.

Ken is a successful writer and online entrepreneur. He has developed as a portal for presenting articles, information, resources, news and links about 529 college savings accounts and other methods of saving for higher education.

Source: EzineArticles
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