529-plan is a tax investment advantage found in the USA. It encourages savings for educational expenses in the future. This savings type has many advantages including protection against creditors as well as many different scholarship and grant opportunities.
This plan evolved into the two separate programs:
– Savings plan whose growth is based on the performance of the investments that consist of mutual funds. This plan has many advantages involving age-based allocation of asset options in which the investments become more conservative over the time. The rate of the change depends on the age of the beneficiary and the time they have before they start the college. Only a state can administer a saving plan.
– The other face of the 529-plan is a prepaid plan. In this case, the tuition credits are purchased on the today’s rates which don’t change. The value of this program depends on the tuition inflation.
The money generated through this plan may be invested in books, supplies, fees, tuition and equipment for the study at an accredited college (it works for other schools that are accepted by the USA and even some foreign universities. A student may use this money to pay for boarding or a room even in the case of off the campus housing.
This plan has many advantages and few disadvantages as well.
– A 529 donor gains a state income tax reduction (sometimes partial and sometimes full depending on other factors).
– The principal investment in the 520 grows, and it is tax-deferred.
– A donor has complete control of the 529 savings account (there are different cases, but in general the donor decides on who has the control). The donor can withdraw their funds without any tax on the withdrawal.
– This plan is an easy way to save money for the college. The donor can easily contribute the money to the account, and they don’t have to manage the investments of the same. This part of the job is in the hands of the investment company or a state treasurer’s office.
Content goes here – A final advantage is the lack of tax or penalty for withdrawal of the funds from the 529 account. An individual can use the 529 plan to save the money and avoid estate tax while using that money as estate planning tool.
– The 529-plan doesn’t cover all investment vehicles. For example, exchanges of assets (or reallocations) are allowed within this plan (two per year), which is not a case with other plans like 401(k) plan.
– When a 529-plan gains money through investments, the excess money is subject to the income tax as well as 10 percent of federal tax penalty.
– A student can avoid tax by paying their tuition directly from the 529. This reduces the eligibility for the financial aid of the student.
– If a student wants to avoid reduce of the eligibility for the “American Opportunity Tax Credit) they must pay at least four thousand dollars of college costs per year from other sources.