529 college savings plans: What you should know

Question: I’m a parent and want to begin saving for my children’s college tuition. What tips can you share with me? A: Saving for college is a common goal for many American parents. Earlier this year, changes were made to the child tax credit program for 2021, enacted through the […]

Question: I’m a parent and want to begin saving for my children’s college tuition. What tips can you share with me?

A: Saving for college is a common goal for many American parents. Earlier this year, changes were made to the child tax credit program for 2021, enacted through the American Rescue Plan Act, increasing the tax credit amount and qualifying child age limit. With many Americans receiving a higher child tax credit, it’s a great time to consider a practical use for the additional funds, and a 529 College Savings Plan might be a smart choice.

What is a 529 Plan? 529 College Saving Plans, or “qualified tuition plans,” are similar to qualified retirement plans in that money can grow in an account free from Federal income taxes. Even better than most retirement plans, qualifying distributions from the plans are not subject to income tax.  To qualify for the tax-free treatment, 529 funds withdrawn must be used toward eligible education expenses, like college tuition, K-12 tuition, and student loan repayments. Contributions to the plan are considered gifts for tax purposes and follow gift tax exclusions and rules.

Tom Cooney with Wealth Dimensions

How can the funds be used? Approved use of 529 funds may differ slightly from plan to plan, depending on the rules of the plan sponsor. Parents are currently allowed to withdraw up to $10,000 a year per student to spend on tuition for K-12 grades. You can also withdraw tax-free for college expenses, including:

  • College books and supplies College computer and internet access
  • College room and board (if the student is enrolled at least half-time)
  • Student loans (with a lifetime limit of $10,000)

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