It’s never been more important for the children in your life to receive a college education. Studies show over a lifetime, the earning gap between a person with a high school education and one who has a college degree may exceed $1 million.
According to The College Board—a not-for-profit educational association—for 2000-2001, average costs for one year at a state university totaled $11,338 and $24,946 at a private school. Should you also be thinking about graduate or professional school, the costs really skyrocket.
A 529 Plan Can Help
Although funding a child’s way through college will never be easy, some help is available through Section 529 College Savings Plans (also called qualified tuition programs). These plans were created under section 529 of the Internal Revenue Code to help U.S. citizens and permanent residents meet higher education expenses and offer considerable financial benefits, such as:
- Tax Advantages. Your plan can grow federal income tax-deferred. Withdrawals are also free of federal income taxes when used for qualified educational expenses.
- Gift and Estate Tax Benefits. Your plan allows you certain gift tax exclusions and offers special estate planning advantages without triggering federal gift taxes.
- Flexibility. You can use your plan’s funds at any accredited institution of higher education in the U.S.
- Additional Contributors. Parents aren’t the only ones who can contribute to a 529 plan. Grandparents, other relatives, and even friends can make contributions.
- Investment Choices. You can choose from a variety of investment strategies best suited to your individual circumstances and risk tolerance. You’ll also benefit from the professional investment management skills of major mutual fund companies.
Types of Plans
Prior to 1996, prepaid tuition plans allowed you to purchase tomorrow’s in-state college education at today’s prices. This was an attractive advantage, since you were assured your bill was prepaid, but this type of plan required that your child attend a school in your state.
Under a 529 Savings Plan, you may create an account in your name and choose a beneficiary—your child, a grandchild, the child of a friend, or even yourself. Your regular contributions to the plan can grow tax-deferred until withdrawal and, if spent on qualified higher education expenses, will be tax-free when withdrawn. In most cases, this can result in considerable savings. Best of all, the money can be spent at any eligible college or other post-secondary educational institution in the country.
To Learn More
Although Section 529 Plans make saving for college considerably easier, they may not be for everyone. If your child is very young and you’re comfortable making your own investment decisions, you might prefer to invest these funds yourself. But whatever route you take, be sure to begin early. IBI