If saving for college expenses is a good thing, then saving on your taxes at the same time is even better. So, what is the best way to save for college and maximize your tax breaks? In short – a 529 Plan. Here are a few commonly asked questions about 529 college savings plans and taxes.

What is a 529 Plan?

A 529 plan is a college savings plan, administered by each state, that allows you to deposit after-tax funds into an investment or savings account. Gains on investments can accrue tax-free and withdrawals for qualified education expenses can be taken without tax or penalty. Rules, fees, and options vary by state.

What kind of account is a 529?

In many states, you can choose between a guaranteed savings plan which is a low risk, straightforward savings account, or an investment account which has a slight risk, but the advantage of greater returns on your investment. You can also choose a pre-paid tuition plan or a savings plan. Again, these vary from state to state.

Do I have to choose a 529 administered by my home state?

No. The market is competitive, so do your homework and choose the state plan that best fits your needs. Note that your home state may offer incentives to “keep your business.”

How does a 529 plan provide tax advantages?

First, the gains or growth on your investment can accrue tax-free. Second, withdrawals are tax-free for qualified education expenses including tuition, books, room, board, tutors, and some technology expenses.

Are contributions to a 529 plan tax deductible?

While contributions are not tax deductible at the federal level, they are deductible from state income taxes in some states.

Who “owns” the account, the parent or child?

Typically, a parent opens a 529 and names a child as the beneficiary of the account. There can only be one beneficiary per 529 account. So, if you have more than one child, you may consider opening multiple accounts. However, you can change the beneficiary of the account or roll funds from one fund to another without tax penalty.

Are their advantages to having the child “own” the account?

Not really. In fact, putting the account in the child’s name, rather than naming them as the beneficiary of the account, could have a negative impact on their ability to obtain financial aid. This is because, when you complete the Free Application for Federal Student Aid (FAFSA) investment accounts are included as part of your financial portrait. Non-retirement investment funds of parents are assessed at a rate of 5.64% of their value, while investment funds of the child are assessed at 20% of their value.

Clearly, there are a lot of considerations when you are saving for college – some are listed here. Contact us if you want more extensive advice on getting the maximum savings and tax advantages on your investment. Click here for more information on other ways to save for college.