529 College Savings Plans

The Ins And Outs Of Section 529 Plans

In this article, you'll learn the basics of what comprises college savings section 529 plans. These plans are educational savings accounts that are specifically designed investments which allow you to amass a savings that can go towards college. It's sponsored by a state or state agency; and it doesn't depend on what state you might live in; you can open and contribute to any state's section 529 plans no matter where you live.

These are the 529 plan withdrawal rules: In the last decade, more money flows into section 529 plans than into custodial (UGMA / UTMA) accounts. Some cash-strapped parents are now wishing that they could get some of that money back.
Fortunately, these Section 529 accounts allow parents to retain more control over the money than UGMA and UTMA accounts did.

If someone has contributed to section 529 plans, they can choose to access that money for any reason at all, without them having to explain what they need it for; and it doesn't even have to be for the child's benefit.

However, there are Taxes and Penalties associated with such Section 529 Withdrawals; any money that's withdrawn from your Section 529 plan that isn't going to be used for higher education expenses is subject to income taxes on the profits and a 10% penalty.
If you were to put $10,000 into section 529 plans, and it's now worth $15,000, you'd have gained a profit of $5,000; and if you were to withdraw that amount for non-529 eligible expenses, you'd have to pay income tax on the $5000 gain and a 10% penalty.

Also, you might find that the underlying investment is subject to a surrender fee. If a full-service stockbroker sold you the Section 529 Plans and you own "B" or "C" class mutual fund shares, they'll likely hit you with that surrender penalty.

Although contributions are made with after-tax dollars, those investments will grow¡­ tax deferred. This has the potential of boosting the investment's growth.  If you withdraw the money, they're federally tax-free as long as you use them for qualified education expenses.

But, you can invest for a college education with a college savings 529 plans; and you can open and contribute to any state's 529 plan, no matter what state you live in.

Contributing a lump sum of up to $65,000, or $130,000 per couple, in a single year doesn't incur a gift tax. Plus, you as account holder, can move your assets out of the taxable estate, yet at the same time, you maintain ownership and control of those assets.

There are also state tax benefits to Section 529 educational savings accounts, and some states offer additional tax benefits to residents as long as they invest in their own state's plan; some even allow you to invest in other state's plans. How much you can deduct varies widely from state-to-state, so you should juggle all of the facts that might be associated with a plan such as your investment options, the performance of the plan and any fees that might be incurred.

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