If you do not know what a 529 account is, you should know that it is a qualified tuition program (QTP). Usually, these programs are maintained by an agency or by a State claims the IRS.
Basically, this 529 plan helps contributors prepay their children’s qualified higher education expenses at an eligible institution. On other occasions, it simply makes contributions to a 529 account to be able to pay those expenses in the future said the IRS.
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IRS claims QTPs have many benefits
The first thing that you should know before getting a 529 plan is the fact that the “earnings accumulate tax free while in the account”. Undoubtedly, this is something great.
The IRS insists that, in general, the beneficiary does not have to include the earnings from a 529 plan or QTP as part of their income. The list of benefits goes on since distributions are not taxable when you use them to pay for qualified higher education expenses.
Bear in mind that if the amount of the distribution is bigger than the this eligible expense for higher education, at least a portion of the earnings is taxable. So, be careful.
IRS says this is the lifetime limit for a 529 plan
Of course, there is always a limit. The amount of distributions for loan repayments can be up to $10,000. Do not forget that you can withdraw money to pay interest or principal on an eligible beneficiary’s student loan.
However, it is also possible to do it for their sibling’s student loan. the last thing the IRS reminds is the fact that the interest you pay with these funds does not qualify for the student loan interest deduction.
- A 529 plan account can start as early as you can.
- 529 plans are not the only way to save for education e.g. UTMA or UGMA.
- You can go through a broker or open a 529 account directly.
- Think about fees before choosing a 529 plan.
- Some plans are more risky than others, so the level of risk matter