Avoid Debt And Taxes With 529 College Savings Plan
To view our videos, you need to
enable JavaScript. Learn how.
install Adobe Flash 9 or above. Install now.
Then come back here and refresh the page.
Avoiding massive college loans isn't the only benefit of saving in a 529 program. There are also some important tax advantages to this long-term planning tool. NY1’s Tara Lynn Wagner filed the following report. Saving for college in a 529 program is a great idea for a number of reasons, not the least of which is that money in the account grows without being hit by the federal income tax.
“Let’s assume you start at birth through the age of 18, that could be 18 years of tax-free accumulation of income, and ultimately when they take that money out, that money will be free of federal income tax,” says John Vento, certified financial planner.
The money will possibly be untouched by state income tax, as well, depending on the state. In some, like New York or North Carolina, contributions to a 529 plan are also tax deductible up to a point. In New York, for instance, it's $5,000 for single filers and $10,000 for those filing jointly. While it's not necessary to choose a plan sponsored by your home state, George Makras of Upromise Investments says there are benefits to keeping it local.
“If I am a resident and tax payer in New York and I choose a plan outside the state, I’m giving up that state tax deduction,” says Makras.
Taxes aside, a 529 can also be an important tool for estate planning, particularly if a child is lucky enough to have some rich grandparents.
While the maximum contribution is $13,000 per person per child per year, the account can be pre-loaded for up to five years.
“Now, that's $13,000 times five which is $65,000,” says Alan Kahn, president of AJK Financial Group. “Between a grandma and a grandpa, husband or wife, that's $130,000 per grandchild or per child.
That may be a little too steep for some, but regardless of how small annual contributions may be, if planned just right, the 529 program can help children and keep money out of Uncle Sam’s pocket.
“It’s one of the few cases that I can think of where you'll get a tax benefit of putting money into this plan and you'll also get tax free income on the way out,” says Vento. “Very powerful tool, definitely something people should consider doing.”
To compare state plans and see which ones offer resident tax deductions, visit collegesavings.org.