It’s fun to imagine what your child’s future holds. If college is part of your dream, you may also be thinking about how to pay for tuition. One way is to establish a tax-advantaged plan that you — as well as family members and friends — can contribute to on birthdays, special occasions, or any time at all.
One such account is known as a 529 plan. These state-qualified tuition programs, named for a section of the federal income tax code, offer tax benefits in three ways.
- Income taxes. The contributions you make to 529 plans are not tax-deductible on your federal income tax return. However, account earnings are tax-deferred, and can be tax-free if the withdrawals are used to pay for qualified educational expenses.
- Gift taxes. While 529 plan contributions are subject to gift and generation-skipping tax rules, you can also take advantage of a special option: the opportunity to make five years’ worth of gifts at once, gift-tax free. Since the annual gift tax exclusion is $14,000 for 2013, you could potentially fund a child’s or grandchild’s account with $70,000, or $140,000 if you choose to split the gifts with your spouse.
- Estate taxes. In general, 529 plan assets are not included in your estate, even if you are the owner of the account. Instead, the assets are considered the property of the account’s beneficiary.
Want to know more about 529 plans? Contact us. We’ll help you compare available plans and choose the one that matches your goals.