With the cost of higher education continually rising, it’s more important than ever to get an early start saving for a child or loved one’s college education. For parents or grandparents considering education-funding possibilities, Section 529 state-sponsored College Savings Plans may be the way to go.
The ABCs
College Savings Plans allow you to invest significant sums of money that can grow tax-free. You can set up an account for anyone—your child, grandchild, niece, or nephew—even yourself. These accounts grow larger than an identical taxable account where earnings are taxed every year. The reason? Dividends and realized capital gains are not taxed annually and continue to grow within the account. Additionally, when the money withdrawn is used to pay for qualified education expenses, including tuition, fees, certain room and board expenses, supplies and equipment, it’s free from federal income tax. Many states also extend favorable tax deductions and tax-free withdrawals to state residents. Check with your tax advisor on this point.
Contributions to College Savings Plans are usually invested in one or more predetermined structured portfolios. Typically, plans include age-based or years-to-enrollment portfolios that become more conservative as the child nears college enrollment. Early on, the portfolio will usually hold more stocks.
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