One of the most popular ways to save for education is through a 529 plan. A 529 plan is a tax-advantaged savings account specifically designed to encourage saving for college, K-12 tuition, or apprenticeship programs. Here are some of the tax benefits of 529 plans:
The earnings in a 529 plan grow tax-free and are not subject to tax when withdrawn for qualified education expenses such as tuition, fees, books, room, and board. Contrast this to saving in a regular investment account where annual income taxes are due on interest and dividends as well as long-term capital gains taxes when the assets are eventually liquidated, and the difference is meaningful.
State Income Tax Deductions
Many states, like Georgia, offer tax deductions or credits for 529 plan contributions which can reduce your state tax liability. In Georgia, you can deduct up to $8,000 per beneficiary on your state return.
High Contribution Limits
529 plans have high contribution limits, which allows you to save more for education expenses than in other types of accounts such as a Coverdell ESA.
Estate Planning Benefits
529 account contributions are a great estate planning tool. Parents and grandparents can reduce their taxable estates by making gifts to these accounts. In addition, the money in 529 accounts is exempt from federal estate tax if you have a taxable estate.
There is also flexibility if you end up with unused funds in a 529 account. It is easy to change the beneficiary to another child in the family. Leftover funds may also be used for graduate school. If the beneficiary receives a scholarship, an amount equal to the scholarship may be withdrawn penalty-free. If all other options have been exhausted, the remaining funds may be withdrawn, and you will pay income taxes and a 10% penalty on the earnings portion of the withdrawal.
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