Education is one of the most important items for the next generation. However, with each passing year the cost of tuition, books, supplies, and housing increases. This is where the Qualified Tuition Program 529 Plan, also known as the Education Savings Account, helps.
The 529 plan was designed to give tax benefits to those that invest in the next generation through a qualified education account. Establishing a plan allows you to invest the contributions into stocks, bonds, REITs, etc. A plan can be established for anyone and can be transferred to other individuals.
Uses:
Funds from a 529 plan are tax-free, including the gains, if used on qualifying expenses. These expenses include books, supplies, equipment, room and board (must be at least half-time student), K-12 expenses (private school), apprenticeship programs, education loan repayments, and more.
Benefits:
The earnings from your annual contributions are tax-free if used on qualifying expenses. Currently has no income limit to contribute. No annual contribution limit unless funds are used for K-12.
Downsides:
There are no tax benefits for annual contributions. If funds are not used for qualifying education expenses, they are subject to tax and a 10% penalty. Not all states conform.
Next Steps:
Opening an accounting is fairly easy and can be done online without ever speaking with a representative. Once established, watch for a 1099-Q once funds are withdrawn.
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