Paying for College with Tax-Free Money

{2:35 minutes to read}

One of the many ways that we are able to help clients is by showing them how to save and pay for future college expenses.

In 1996, under section 529 of the Internal Revenue Code, a program was established that offers families an excellent way to save - and grow - money for future qualified college expenses.

The 529 plan has no income limitations. It works for wealthy investors and middle-class families alike. The contributions are not tax-deductible, but some states do offer in-state tax breaks. Deposit limits are very large so the plan can also be utilized as a regular savings program. Some of our wealthier clients have opted to make large deposits because once money has been gifted to the 529 plan, it is no longer figured into the value of their estate. Additionally, these funds can be used for future generations when planning to pay for college. Some clients have referred to it as a private family foundation.   

Let the 529 plan work for you:

  • Deposit the money after tax.

  • Grow the money tax-deferred.

  • Withdraw the money 100% tax-free for qualified higher education expenses.

The IRS allows for two investment changes per calendar year - possibly more will be permitted in the future. However, the plan is not designed for people who like to day trade. This is a long-term strategy to pay for college education.

Another nice feature of the plan is its age-based portfolios which automatically reduce the risk as your son or daughter gets closer to college age. This was not the case a few years back. A lot of people had saved money for college - the markets were doing very well, and they had good equities - and then in 2008 came the big crash. Some saw their 529s reduced by nearly half. That experience led to the creation of age-based portfolios; as your child gets closer to attending college there is less volatility in the account.  

Now, with the help of your financial advisor, you can save and be more confident that, when your son or daughter is ready for college, the money will be there.

How can Beacon Financial Group help you plan for your child’s future college expenses?

529 Tax-Free Provisions

An investor should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. More information is available in the issuer’s official statement which can be obtained from your financial professional. The official statement should be read carefully before investing.

Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents and taxpayers. The investments inside a 529 plan may fluctuate with changes in market conditions; redeemed shares may be worth more or less than their original value.

Non-qualified withdrawals do not enjoy tax-favored treatment. The earnings part of a non-qualified withdrawal will be subject to federal income tax, and the tax will typically be assessed at the account owner's rate, not at the beneficiary's rate. Plus, the earnings part of a non-qualified withdrawal will be subject to a 10% federal penalty and possibly a state penalty, too.

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