A 529 plan is a college savings plan with tax benefits. They have been around for 15 years, but there are still many misconceptions. I summarized these four tips from Marina Goodman, an investment strategist at Brinton Eaton in New Jersey.
1. Not realizing you can sign up for a 529 plan in any state. Just because you don’t live in Idaho doesn’t mean you can’t join that state’s 529 plan. While you can get lower state taxes for joining your home state’s plan, each state sets its own
fees and rules so joining an out-of-state plan may earn you more money in the long run.
2. Not calculating plan costs. Some 529 plans have an account maintenance fee, typically if you have a low balance or live out of state. But not all plans carry this fee. Other fees may include managing the plan and for the mutual funds in which the 529 plan invests. Whether the plan lists them separately or together, make sure you have a finger on the total cost of the plan. Some of the cheapest 529 plans charge between 0.25% and 0.35% and are offered by Iowa, Michigan, and New York.
Tip: If your kid is about to enter college or already enrolled, invest in a conservative plan (because you can’t afford to lose any money). You can do this for free in a few 529 plans, including those in Connecticut and Michigan.
3. Forgetting about gift tax consequences. Contributions to a 529 plan are considered a gift under Federal law and may be subject to additional taxes. You can give up to $13,000 per year ($26,000 for married couples) into each 529 plan (one for each designated beneficiary, i.e. your kid) without incurring the gift tax.
Tip: You can contribute up to five years’ worth of gifts at once – $65,000 in one year for each beneficiary and $130,000 if you are married. But contribute anything more to that kid over the next five years and you may be subject to the gift tax.
4. Ignoring rewards programs. Fidelity has a credit card that contributes 2% of all your purchases to one of their 529 plans. Upromise chips in a percentage of qualified purchases to a few different 529 plans, including Iowa and New York. If you average $2,000 in monthly expenses on your credit card, that adds up to an extra $10,000 in the 529 plan by your child’s junior year in college.
Tip: A great resource that Goodman recommends for more info on 529 plans is www.savingforcollege.com.
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