Cameron Huddleston, Contributing Editor, Kiplinger.com, Kimberly Lankford, Contributing Editor, Kiplinger’s Personal FinanceKiplinger.comFriday, February 22, 2008; 8:12 AM
Since Kiplinger’s aboriginal wrote about tax law changes apropos state-sponsored college-savings affairs in 2001, readers acquire asked absolutely a few questions about how to aces the best plan, how to acquire amid a Coverdell Apprenticeship Accumulation Annual and a 529 plan and how to enroll.
Is a accompaniment 529 plan the way to go?
When the aboriginal Bush tax law took e ffect in 2002, state-sponsored academy accumulation affairs — contrarily accepted as 529 affairs — became the hands-down best best for your c ollege dollars.
Withdrawals for condoning apprenticeship costs are tax-free. This tax-free cachet was set to expire in 2010, b ut Congress fabricated the annual abiding in 2006. Also, 529 affairs are advised as affectionate assets aback it comes to banking aid. (Pare nts are accepted to bang in aloof 5.6% of their assets while acceptance are accepted to accord 20%.)
Here are added affidavit to accede a 529 plan:
Don’t anticipate of Coverdell ESAs and Section 529 affairs as mutually exclusive. If you acquire the money, accede allotment both. ESAs al so can be spent on clandestine academy charge or added able educational expenses.
Which accompaniment has the best plan?
If you alive in one of the 31 states and District of Columbia that action a deductible contribution, there’s proba bly no charge to attending further. Your accumulation on taxes acceptable will affected any shortcomings your state’s 529 plan ability have.
If you don’t get a deduction, again accede these top picks:
What makes these accompaniment affairs so good? Low costs and affluence of inv esting options, two things you should focus on aback authoritative your choice.
Expenses. Anniversary fees, as able-bodied as administration a nd aliment expenses, can eat into allotment and can alter abundantly from accompaniment to state. If you acquire to accessible your annual through a broker, against anon through the state, these fees and accuse may be alike higher. Additionally accumulate in apperception that nonresidents about pay academy fees than residents.
Also, accumulate in apperception that several states amerce non-education withdrawals, usually 10% of ea rnings.
Investment choices. Best states action three or added advance advance that ambit from bourgeois to aggressiv e. One usually is an age-based portfolio that invests mainly in stocks while a adolescent is adolescent again accouterment to bonds and money-market funds the afterpiece academy is on the horizon.
When allotment a track, accede whether it reflects your accident tolerance. If you wouldn’t advance absolutely in stocks in a retirement account, you apparently should n’t do so for a academy accumulation account, either.
How do I enroll?
This is the accessible part. While some affairs bind acceptance to specific months, best are accessible year-round. Acceptance can be as ea sy as downloading a anatomy from the Internet, bushing it out and commitment it in. Some states absolutely let you accessible an annual completel y online.
You accessible an annual with as little as $25 or $50. And you can pay by analysis or set up annual contributions through p ayroll answer or automated abandonment from a appointed coffer account.
Can I cycle accumulation bonds in to a 529 plan?
Yes, and there is no tax penalty.
Cash out the bonds and reinvest the money in the accumulation plan. At tax time you’ll appetite to book IRS Anatomy 8815 to exclude the savin gs band absorption from assets taxes. You additionally charge accomplish abiding that the savings-bond rollover conforms to all the rules and that your i ncome doesn’t beat the limit. Visit the TreasuryDirect Web armpit for added details.
Can I alteration careful annual funds to a 529 plan?
Most 529 affairs acquiesce such a transfer, but there a re a few appropriate rules. Money you put into the kids’ careful accounts was an certain gift, and affective it to a 529 annual does n’t change that fact. The money can never be confused to addition beneficiary, for example, and your accouchement will ascendancy it aback the y ability the age of majority, either 18 or 21, depending on accompaniment law. New money put into a abstracted annual in the aforementioned 529 plan sti ll can be controlled by the parents and confused to addition almsman if the adolescent for whom the annual is advised decides not to go to college.
The acumen amid custodial-account money confused to a 529 plan and added contributions is a acceptable acumen to abstracted accounts. College-savings affairs acquire alone banknote deposits, so you’ll acquire to advertise the stock, alternate funds or added inves tments from the careful annual — and pay capital-gains taxes on any profits — to about-face the money.
Can I write-off a 529 addition o n my accompaniment taxes?
That depends on area you live. The states beneath let association address off contributions to the state’s own plan.
Arkansaa, Colorado, Connecticut, District of Columbia, Georgia,Idaho, llinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Mississipi, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, Wisconsin.
In best cases, it’s the adolescent who gets the answer aback alive custodia l-account money into a 529. Remember: It’s the kid’s money. But a few states may acquiesce parents to affirmation the write-off, says Joseph Hurley, columnist of The Best Way to Save for College: A Complete Guide to 529 Plans. For anniversary state’s deductibility rules, visi t Hurley’s Web site, Savingforcollege.com.
Can I breach my contributions?
There’s no botheration agreeable your contributions amid altered states’ plans. But analysis the deductibility rules carefully. Some states let anniversary apron booty an income-tax answer for contributions, so you ability bifold your answer by aperture up two accounts in your own accompaniment bef ore affective on to addition one. Your claim-the-deduction-then-move-the-money action ability work, Hurley says, but some states “recapt ure” the tax savings. Again, you’ll acquire to analysis with the specific plan’s administrator.
Who controls the plan?
Each annual has an buyer — or collective owners — and that being controls the assets, behindhand of how abounding bodies contribute. The buyer doesn’t acquire to be a parent.
Can I about-face plans?
New rules accomplish it abundant easier to about-face from one state’s plan to another. In the past, this was accustomed alone aback alteration the beneficia ry of the account. Now you can move money as generally as already a year for any reason.
Contact the plan you’d like to about-face into t o get the forms you’ll charge to accomplish the transfer. Because abounding states abide to advance their plans, it’s acute to analysis out the o ptions every year or so.
Can the money be acclimated at a adopted college?
You can use the money at hun dreds of adopted colleges, including the University of Toronto, McGill in Montreal and abounding added Canadian schools. If U.S. acceptance at the academy authorize for federal banking aid, you can use 529-plan or ESA money to pay the bills after annoying that you’ll lo se any of the tax benefits.
© 2008 The Kiplinger Washington Editors
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