A 529 plan is a great college savings tool many Americans can benefit from.
According to Reuters, "contributions to 529 plans are made with after-tax money, but earnings that build up in the account are free of federal and state income taxes when funds are withdrawn for qualified education expenses."
The amount a person should contribute to the plan may vary depending on the kind of 529 plan and the anticipated college costs.
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The good news is there are no yearly contribution limits or income limits on 529 plan investments as in other education savings plans — like the Coverdell Savings Account. The Coverdell only allows a $2,000 investment per year, per beneficiary. There are also income caps on people eligible to invest in Coverdell Savings Accounts,
according to the IRS.
The only restriction on contributions for a 529 plan is the reasonable expense of college.
According to AXA Equitable Financial Services, LLC most states generally have a cap of $300,000 per beneficiary. That includes contributions and growth for all accounts with the same beneficiary. Contributions must be made in cash, but can be made by any person — not just the account holder.
Since a grandparent, or any other person, can start a 529 plan for any beneficiary it is important to note the gift tax. The IRS restricts gifts to $14,000 per year before a tax is incurred.
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A contribution of a lump sum of $70,000 can be made under special tax rules that apply to 529 plans. The gift can be spread over 5 years to eliminate the gift tax penalty.
Another tip in considering yearly contributions is to look for matching grants. Many states have programs that can match your dollars invested up to a certain amount.
In order to calculate how much money your child might need for college, there are a number of online calculators.
For instance, Savingforcollege.com calculates a needed monthly savings of about $1,000 invested in a 529 plan for a child 8 years away from college to take care of the estimated $130,000 price tag of that education.
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