529 College Saving Account Advantages And Disadvantages
What is the benefit when you contribute to 529 529 Savings Accounts? Do you want to invest in a child's higher education and you are a parent, grandparent or legal guardian of that child, there are a few different choices available to you that can let you kill two birds with one stone. Why not invest in a childs savings account such as a 529 College Savings plan, 529 Qualified Tuition plan or an Education Savings Account, the interest earned in one of these types of savings plans or accounts is not subject to federal taxes.
Opening this type of college savings account in a child's name also offers more than relief from the capital gains tax on a federal tax basis. In most states, there are also tax benefits for a 529 College Savings Plan such as those specified above. However, some states may limit just how much a particular investment will receive in terms of a tax break. If withdrawals are made from a college savings account or a prepaid tuition plan and withdrawals are not spent on qualified expenditures, these withdrawals may be penalized and taxed through the IRS. In some cases, these penalties do not apply, however, such as if the intended student receives a scholarship, acquires a disability, or dies.
Should you be looking to invest in this type college savings plan you don't just have to consider only the 529 Qualified Tuition plan or prepaid tuition plans. You can also opt for the Coverdell Education Savings Account, which will not only cover higher education costs, but will also help out with eligible elementary and secondary school expenses. As with the 529 Prepaid Tuition Plan and the 529 College Savings Account, the Coverdell Education Savings Account will penalize you if you make purchases that do not qualify as a legitimate expense under the plan's specifications.
Just about anyone is eligible for either the 529 Prepaid Tuition Plan or the 529 College Savings Accounts in most states. However, many states have the restriction that either the student or contributor must live in the state the plan or account was established in.
One disadvantage you will find to using a 529 Plan or Education Savings Account. That is, there are usually limit caps of $300,000 total for a 529 Plan or two thousand dollars annually for a Coverdell ESA. A few plans may also limit how much can be contributed annually and still be non taxable. No matter how you look at it though, investing in a 529 College Savings Plan is a can't miss investment in the future of your children.
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