Saving for college - 529 plans

Saving for college - 529 plans

Saving for college - 529 plans

What is a 529 plan? 529 plans are investment vehicles designed to help families pay for future expenses associated with college or other qualified post-secondary training. Though contributions to a 529 plan are not deductible, these plans offer other tax advantages. All 50 states and the District of Columbia sponsor at least one type of 529 plan.

Computer technology expansion continues in 2010. The American Recovery and Reinvestment Act of 2009 (ARRA) added computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the 529 plan while enrolled at an eligible educational institution. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature.

More on "computer technology or equipment". This phrase refers to computers and related peripheral equipment. Related peripheral equipment is defined as any auxiliary machine (whether online or offline) that is designed to be placed under the control of the central processing unit of a computer, such as a printer. This does not include equipment of a kind used primarily for amusement or entertainment. "Computer technology" also includes computer software used for educational purposes.

Note: Congress created 529 plans in 1996. They're named after Section 529 of the Internal Revenue Code. The legal name for 529 plans in the tax code is "qualified tuition programs."

Why use a 529 plan? There are several advantages of 529 plans and one may be applicable to your family's needs. Earnings are not subject to federal tax when used for eligible college expenses. Earnings are often not subject to state tax. States may offer other incentives to in-state participants. There are no income restrictions on individual contributors. Contributions are only limited by the qualified education expenses of the beneficiary. You can change the beneficiary of a plan if the new beneficiary is in the same family. You can open a plan benefiting anyone: a relative, a friend, or even yourself. The plan owner or custodian controls the funds until withdrawal, not the beneficiary.

How 529 plans are structured. There are two basic types of 529 plans - prepaid tuition plans and savings plans. A prepaid tuition plan enables a family to pay for future tuition now in current dollars and prices. A savings plan enables a family to accumulate funds in a tax-advantaged way for future tuition costs. A 529 plan can be established and maintained by a state, a state agency, or an eligible educational institution. Each 529 plan is somewhat unique. Some state-sponsored plans offer incentives to in-state participants, such as state-income-tax deductions or credits. Each 529 plan has one custodian and one beneficiary. A student or future student can be the beneficiary of more than one 529 plan.

Contribution limitations. Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. Contributors should be aware of potential gift tax issues if the amount contributed by any one contributor during a year to a given beneficiary, together with other gifts to that beneficiary, is greater than $13,000.

Use with other aid. A family using a 529 plan to pay for some of a child's college expenses may still be eligible to claim either the American opportunity credit or the lifetime learning credit.

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