How to Set Up a 529 College Savings Plan? |
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A 529 college savings plan names after section 529 of the Internal Revenue Code. It is a state sponsored savings plan. The purpose of saving in this plan is to create a fund for your child to cover his future education costs when he enters college or university.
There are federal tax benefits for setting up a 529 college savings plan. State level may also offer state tax break to those who invest in this plan. The money you put in to this scheme is subject to tax, but the investment earnings from this plan are tax free. If you take out the money to pay for college, namely tuition, room and board and all the college related expenses, they are all tax exempted. If you cash out on the plan half way and not meant for paying for the higher education costs, you may have to pay income tax on the gaining portions of your money and 10% penalty to the government. If your child get a scholarship, become disabled or pass away, the tax and the penalty can be waived.
529 plans are administered by individual states, but you can choose any state plan that meets your needs and not limited to your own home state plan. The difference is if you're not a resident, you may need to pay higher commission rates and have less investment options. If you invest in your own state's plan, you may get the state tax benefits.
There are 2 types 529 college savings plan:
You can search online to compare the benefits of different plans or you can seek help from a financial advisor to get a plan that match your needs. You may want to start finding the plans details of your own state first. Check out to see if they really give you huge advantages compare to the plans from other states. Get yourself familiar with how the commissions are charged in different plans. They can be high depends on the state.
After you have got the details and feel satisfied, act immediately. It is always better to start early.
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