529 college savings plan

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529 College Savings Plan

An account into which persons deposit funds to save for university-related expenses. The funds in a 529 college savings account are tax-deferred and, if used directly to pay for college, tax exempt at the federal level. They are sometimes exempt at the state level as well. The plan exists in an attempt to make post-secondary education more affordable. See also: IRA, 401(k).

529 college savings plan.

Each 529 college savings plan is sponsored by a particular state or group of states, and while each plan is a little different, they share many basic elements.

When you invest in a 529 savings plan, any earnings in your account accumulate tax free, and you can make federally tax-free withdrawals to pay for qualified educational expenses, such as college tuition, room and board, and books at any accredited college, university, vocational, or technical program in the United States and a number of institutions overseas.

Some states also exempt earnings from state income tax, and may offer additional advantages to state residents, such as tax deductions for contributions.

You must name a beneficiary when you open a 529 savings plan account, but you may change beneficiaries if you wish, as long as the new beneficiary is a member of the same extended family as the original beneficiary.

In most cases, you may choose any state's plan, even if neither you nor your beneficiary live in that state. There are no income limits restricting who can contribute to a plan, and the lifetime contributions are more than $300,000 in some states.

You can make a one-time contribution of $60,000 without incurring potential gift tax, provided you don't make another contribution for five years. Or, you may prefer to add smaller amounts, up to the annual gift exclusion.

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The bill also updates limitations on exempt property by: increasing the dollar limitation on household goods from $10,000 to $20,000; changing the personal automobile exemption to a personal motor vehicle exemption based on gross weight and limiting the exemption to two motor vehicles; and including all qualified tuition plans authorized by Internal Revenue Code [section]529.
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You should be aware that other states may sponsor their own qualified tuition plans and may offer a state tax deduction or other benefits that are limited to residents who invest in that plan.
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An array of tax benefits are available to taxpayers, including income exclusions for educational assistance, scholarships, and distributions from qualified tuition plans and educational IRAs, as well as credits for tuition and certain education-related expenses and a deduction for tuition payments.
While taxpayers have focused lately on the benefits of IRC section 529 qualified tuition plans (QTPs), Coverdell Education Savings Accounts (ESAs) offer an attractive alternative.
Also known as qualified tuition plans, the rules vary by state, but some allow you to contribute more than $10,000 per year per student or up to $50,000 maximum every five years, whichever comes first.

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