With the average cost of a four-year college skyrocketing more and more every year, many parents do not know where to turn to invest money for their children. Luckily, the 529 Plan exists to help you turn your hard earned dollar into a first class education for your son or daughter.
Since 1996, every state has been operating qualified tuition programs, better known as 529 plans. A 529 plan is a state-run, tax-free savings program that allows you to put money away for your children’s future college expenses. They are designed to make whatever income you deposit into them exempt from federal income tax.
A 529 plan is a program geared towards funding a college education. One of the benefits of a 529 plan is the tax break. For example, all of the money put into a 529 plan is federal and state income tax free.
You are probably well aware that college costs are soaring and that the need for parents to build college savings has never been greater. You may also be aware of various loyalty reward programs (such as Upromise and BabyMint) that pledge to help build your college savings by paying back a small percentage of the amount you spend using their credit card and/or buying certain products. Companies offer these programs because, in the aggregate, they know they will lead to higher spending on their products or services. Smart consumers learn to maximize earned rewards without altering their spending habits.
The hardest part about saving for college is just to start doing it. Where to begin? Well, if you have not heard the news yet, 529 College Savings Plans, tax-free funds that have been made possible by laws passed in 2002, provide the best opportunity to meet the growing cost of college. Marketing of 529 plans has picked up, as you may have noticed, but this usually leads people down the wrong path. The way fund managers typically market their plans is as if they were the only plans available. This is a very tricky tactic yet it works because these plans are so new and most people are not aware that there are over 80 plans and more than 1,000 investment options to choose from.
Thanks to newly enacted tax legislation called Section 529, saving for college has become a lot more manageable. This IRS tax code, first passed in 1996, states that investments in Qualified Tuition Programs (otherwise known as 529 plans) grow 100% federally tax-free, as long as the funds are utilized for Qualified Higher Education Expenses. Federal tax treatment is just one of the many benefits of 529 plans.