529 Plans are one of the best options for saving for college for your child. Yet, studies show many Americans are unfamiliar with 529 Plans. Many do not know the details of how to open, contribute, and receive big tax benefits from these plans.
Rest assured, all of these questions will be answered.
Let's take a look at the most frequently asked questions regarding 529 Plans.
Is there a limit to how much can I contribute to a 529 Plan?
529 policies vary from state-to-state. Each state sets their own contribution limit. The limits tend to fall between $250,000 - $550,000 per beneficiary.
This limit is the total amount of money you can contribute to one beneficiary. An account owner can open multiple accounts for multiple beneficiaries.
If you have $550,000 in your 529 Plan, you are doing great! If not, do not worry. I am going to show you how quickly the money can add up if you start investing now.
What's the benefit of a 529 Plan vs. a regular savings account?
One of the biggest benefits for residents is state tax deductions. Once again, each state sets their own limitations on this.
Some states - such as Florida, Nevada, and Texas - have no income tax. Therefore, no deduction for 529 Plan contributions.
If you live in a state with no income tax, I want you to know I am jealous.
I also want you to know that tax breaks are not the only factor to consider. Consider the investment options offered by your state plan, fees, and expenses. These criteria are quite important as well.
Can you open an out-of-state 529 Plan?
Yes.
While the majority of people go with their own state's 529 Plan, it is possible to open and fund a plan in another state.
In fact, Arizona, Pennsylvania, and Maine are a few of the states that offer their residents tax deductions for contributions to any 529 plan. They do not limit deductions only to their state plan.
Other states - such as California, Hawaii, and New Jersey - have a state income tax, but do not offer an income tax deduction for 529 contributions.
Since many of the tax benefits vary state-to-state, it is important to research your state's plan and decide if an out-of-state plan might be a better option.
If you are considering switching your account to another plan, keep in mind, many states charge a transfer fee if you go from an in-state plan to an out-of-state plan. However, every state does allow a once-per-year rollover to another 529 plan with no tax consequences.With so many options to choose from, it's worth spending some time upfront to research a plan, whether it is in-state or out-of-state, that meets your investment objectives.
How quickly can the money add up in a 529 Plan?
Let's assume you contribute $14,000 a year to a 529 Plan.
Why $14,000?
Well, that is the amount you can contribute per beneficiary per year without triggering federal gift taxes.
Initial contribution: $14,000
Initial contribution date: child age - 4 years
Contributions per year: $14,000
Annual return: 6.5% (compounded annually)
Total amount contributed: $196,000
Account value by age 18: $324,550
I don't know about you, but I would be a happy student if I knew I had $324,550 in my 529 account to pay for college or grad school or medical school.
What I am trying to say here, is that it's doable.
Start investing now. Contribute what you can. It adds up.