You can start saving for your children’s college education using a 529 plan. 529 plans, which are named after the section of the Internal Revenue Code that permits them, help parents save tax dollars on college savings money.
Placing money in a 529 savings plan gives you substantial tax advantages. While you still pay income tax on any money you put in the plan, you do not pay taxes on any earnings generated by that money while it stays in the plan. In other words, after you contribute money to a 529 plan, any interest or gains earned by the money through investing is tax-free. When you take money out of a 529 plan, it is tax-free as well, as long as you use the money to pay for your child’s tuition, room and board, or other typical college expenses.
Because there is no cap on tax savings (besides paying potential gift tax for large contributions) and no income limitations, 529 plans are extremely advantageous for parents who start saving early. If you need to take out money from a 529 plan in an emergency, you will pay both income tax on the gains and a 10% penalty. It is better to let the money sit over time and only take it out when your child enters college.
The state of California has selected an administrator for 529 plans. If you want to start a California 529, you have to work with this administrator. You can choose to invest with another state’s chosen administrator instead, but doing so can have tax consequences. To learn more about California’s 529 plans, visit the ScholarShare website or speak to your estate planning attorney.
After you sign up for a 529 plan, you can start placing money in the account the administrator sets up for the plan. Your contributions may not exceed the amount necessary to pay education expenses for your child. To attempt to generate the most savings towards your child’s college education, you will want to invest that money in stocks, mutual funds, and other investment vehicles. Again, any gain the investment vehicles generate is tax-free.
Among the recent changes to federal tax laws is a provision allowing non-college distributions from 529 plans. This provision allows parents to take up to $10,000 in tax-free distributions per student per year from a 529 plan to use towards tuition expenses at elementary, middle, or high schools. The schools can be public, private, or religious to qualify. In effect, this new provision makes a 529 plan more of an education savings plan, rather than a college-only savings plan.
Planning your college savings strategy? Angela Klenk, Esq. and the team at Beach Cities Estate Law couple personalized attention to your estate plan with big law firm experience for a winning combination to give you peace of mind. To schedule a case evaluation, visit Beach Cities Estate Law online or call (424) 400-2125.