Trying to figure out how to pay for all those college costs
ahead? Then check out these tax-favored alternatives.
Section 529 plans:
Section 529 plans have two main varieties, prepaid tuition
programs and college savings accounts.
Trying to figure out how to pay for all those college costs ahead? Then check out these tax-favored alternatives.
Section 529 plans:
Section 529 plans have two main varieties, prepaid tuition programs and college savings accounts.
– Prepaid tuition programs let you buy future tuition credits at today’s rates. In effect, your rate of return matches the rate college tuition increases currently 5 percent to 8 percent a year for public schools.
Certain private schools may also offer these plans.
– College savings accounts let you set aside funds in an investment account. Distributions may be used not only for tuition, but other common college costs as well, such as room and board and supplies.
No federal deduction is available for contributions to Section 529 plans, but distributions to pay for college are generally tax-free.
Education savings ac-counts:
Formerly known as education IRAs, education savings accounts are gaining popularity now that the contribution limit has been raised from $500 to $2,000 a year.
Additionally, tax-free distributions can be made not only for qualified higher-education costs, but also for many K-12 expenses. As with 529 plans, contributions to these investment accounts are nondeductible.
Unlike 529 plans, phase-out rules may prevent higher-income taxpayers from contributing.
Other savings strategies:
You may want to check other options for college savings.
Consider investing in qualified U.S. savings bonds; the interest is generally excludable when used for qualified higher education expenses. Or you may want to use a Roth IRA.
Funds used for qualified education expenses are not subject to the 10 percent early withdrawal penalty.
For assistance in choosing the college savings method best suited to your particular situation, contact your accountant or tax planner.
Kerry Lorincz is a certified public accountant and partner with the accounting and business consulting firm of Bianchi, Lorincz & Company located in downtown Hollister.
