College Savings Plans
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College Savings Plans

Article about college saving plans and methods to finance education in the united states

Quality education is expensive and to allow parents to grant their children to study they have to plan their finances for this. These College Saving Plans are known as 529 plans. There are two types of college saving plans: prepaid and savings. The prepaid plan allows parents to purchase tuition credits, at today’s rates, for use in the future. The savings plan is based on growth of the invested money so there would be sufficient money available to pay for the required education. Most 529 plans are offering a variety of age-based asset allocation options where the underlying investments become more conservative at the time the beneficiary reaches the age to go to college.

Where to use the College Saving Plan for?

Funds in the college saving plan are only allowed to be used for qualified education expenses.

This means that in general the funds can be used for the following;

• Tuition fees,

• Books,

• Supplies and equipment required for study at any accredited college, university or vocational school in the United States.

• Room and board

Off-campus cost

These qualified expenses do not include any student loans or student loan interest.

Tax Advantages for College Saving Plans

According to the Economic Growth and Tax Relief Reconciliation Act of 2001 any qualified 529 plan savings and funds are exempt from federal income tax. If the college saving plan is not qualified for the above act, then the educational expenses is subject to income tax and an additional 10% penalty can apply.

The Advantages of a College Saving Plan

The main advantages of a proper college saving plan are;

• The donor qualifies for state income tax deduction for all parts of the contributions to the college saving plan

• The donor keeps control of the account instead of the beneficiary.

• The college saving plan provides an easy hands-off way to save for college with simple forms and automatic deposits

• The funds can be reclaimed by the donor

• The assets are not counted as part of the donor’s gross estate for estate tax purposes

• The unused funds are transferable to other beneficiaries of the family without tax penalty

Qualified members

Qualified members of the beneficiary’s family are;

• Spouse

• Son, daughter, stepchild, foster child, adopted child, or descendants of any of them

• Brothers, Sisters, stepbrothers, stepsisters

• Father or mother

• Stepfather or stepmother

• Son or daughter of a brother or sister

• Brother or sister of father or mother

• Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law

• Spouses of any individual mentioned above

• First cousin

• 2nd cousin

The Disadvantages of a College Saving Plan

The number of different 529 plans is growing, but not all investment vehicles are available.

• The IRS only allows one single exchange, or relocation, of assets per year

The unused money that is withdrawn from the 529 plan and is spend for other things than the qualified college expenses will be subject to income tax plus 10% penalty

• The college saving account will be counted as an asset the might affect the eligibility for loans

Gift Tax

Any contribution to a 529 college saving plan are considered gifts under federal gift tax regulations. So if any contribution exceeds $65,000 over five years if filing as a single, the contributor’s gift will be counted against the one-time gift/estate tax exemption. With this sum of $65,000 the maximum is reached and the contributor cannot make any gift to the beneficiary under this arrangement.

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