Many parents dread sending their children to college. Books, tuition, lab fees, and dorm rooms can add up to tens of thousands of dollars. Either the parents have to come up with thousands of dollars, or the child has to take out student loans that they might not pay off for decades.
Instead of scrambling for funds at the last minute, talk to a financial advisor about creating a college savings account. College savings plans come in a few varieties. The most popular is the 529 Savings Plan. But there is also, a Coverdell savings account, a custodial account (UGMA/UTMA), and individual trust account. Let’s focus on the most common, the 529 college savings plan. This account allows you to contribute tax-deferred money for tuition and fees. You can wait until college to withdraw the money or take out money for the child's elementary and high school expenses.
College savings plans are like retirement funds: it's never too early to start saving. Many parents and grandparents open a 529 account shortly after the child is born. If they have money saved up, they can start with an initial deposit, then add money whenever they can, even on a monthly basis. Since 529 plans are State sponsored, the maximum amount that can be contributed for each beneficiary is State specific. 529 savings plans are the only savings vehicle that allow an individual to contribute more than the current annual gift amount (up to $16,000) without incurring tax consequences. These types of plans allow the contributor to front load five years’ worth of gifts ($80,000 as of 2022) into one year.
While it's best to start early, it's never too late to make a 529 college savings plan. Even if the child is a teenager, you'll contribute money to their education that they wouldn't have otherwise. You can use the money for other educational expenses if the child earns a scholarship or transfer the account to a sibling for their educational needs.
A 529 college savings plan is an account that you use to save for a child's education. You can set up a savings account and deposit money throughout the years or create a prepaid tuition plan that allows you to save for college tuition in advance. If you withdraw the money for qualified education-related purposes, you won't pay state or federal taxes.
If you withdraw money from a 529 savings plan and don't use it for educational expenses, you'll have to pay taxes and a 10% penalty. When you withdraw money for a K-12 student, you can only take out $10,000 a year to avoid penalties. The law offers one exception: if the student earns a scholarship, you can withdraw the amount of the scholarship without paying the 10% fee.
You can transfer the 529 college savings plan if the beneficiary doesn't use all the money. If you transfer the funds to a qualifying relative, you won't have to pay federal taxes. However, you can't roll over your unused savings to a retirement fund.
Saving for college can be intimidating--if you make a mistake, the beneficiary might lose part of their funds. Instead of trying to guess what to do, talk to a financial advisor to maximize savings and eliminate taxes and penalties. Oceanic Capital Management offers free consultations for people who want to discuss college savings plans and other financial topics.
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