Today, I have another guest article from "Bruce the tax guy" about 529 plans. There is so much to know when it comes to saving for college it's impossible to keep up. I hope this article sheds some light on the topic.
A 529 plan simply put is a college savings plan. There are two types of plans. Plan A: Pre-paid tuition plans (sometimes called guaranteed savings plans and offered in 15 states), and Plan B: college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plans. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan.
Plan A: You pay the cost of tuition at today’s prices for the designee/s to attend later. The earnings here are basically what the difference is in tuition today from what it will be at the designee’s start time.
Plan B: Savings plans are different in that your account earnings are based upon the market performance of the underlying investments, which typically consist of mutual funds.
So how do they help your State return?
I could explain every States individually but will only briefly list the three main States where the majority of my practice resides. (I am current with 28 States 529 Plans)
In my home of residence, Missouri:
· Your assets grow tax-deferred
· withdrawals are exempt from state income tax when used for qualified higher education expenses
· Missouri taxpayers can deduct up to $8,000 in contributions ($16,000 if married filing jointly) from their state income tax each year
Where I started my practice, Iowa:
· taxpayers can deduct up to $2,595 in contributions (adjusted annually for inflation) per beneficiary from their state income tax. For example, a married couple with two children contributing to separate accounts can deduct up to $10,380 (that's 4 x $2,595) for 2007
Thirteen miles to my west, Kansas:
· Any contributor may deduct up to $3,000 for single filers and $6,000 for joint filers per beneficiary for contributions
· follows federal treatment
· offers state matching grants for “Learning Quest"
o residents with household income lower than 200% of the federal poverty level ($42,400 for a family of four) can receive a match when they contribute at least $100 and up to $600 in 2007 and 2008.
With the examples above I hope you can see the benefits each has and that each state varies. With one big similarity, a deduction for contributions made.
Okay I will bet your hoping all this fun is over.
A few more quick thoughts if you please;
· Most States require residence in order to take the deduction
· In most cases if your designee decides not to attend college you can change to a family member of the original designee
· Funds withdrawn for non college uses will be taxed and add back rules could apply to your States return
· Anybody can contribute to the fund
o Meaning you open a fund for your child/ren and Grandparents, Aunts and Uncles’, Brothers and Sisters, etc. and contribute to it/them
Okay, If you have any questions about 529 plans, I have several links listed below or I will be glad to help. Contact me I may not have the immediate answer but I’ll bet free return preparation (from my office), I can find it.
With tax season at an end (sorta), I will have more time for my site. I plan on having more 529 information there soon.
Bruce “the tax guy”