With the costs of higher education skyrocketing and showing no signs of becoming more affordable, many grandparents are taking it upon themselves to sock away cash to help youngsters down the road. Thanks to Section 529 college savings plans, the task can pay off doubly for grandparents. These plans not only provide grandparents a way to save for youngsters, they provide a tax break, too.
Section 529 savings plans are different than prepaid tuition programs. The savings account option enables anyone to establish a tax-free account on behalf of a child. This means parents, grandparents, other relatives and even family friends can establish these accounts.
When a Section 529 plan is opened, the money will earn interest tax free. Eventual distributions will also be tax-free as long as the money is used for educational related purposes. This means withdrawals must go for such things as tuition, books, fees, room and board and so on. The child must be enrolled in an accredited university or college for the tax-free distributions to count.
Using Section 529 savings plans is an excellent way for grandparents to assist with college costs. With average tuition for four-year, private schools now running more than $100,000, the need for a little nest egg is becoming evident. Grandparents will find that Section 529 plans are fairly easy to establish and they can be opened for multiple children, as well.
When creating these plans, it is important to keep a few things in mind, such as:
The allowable limits - It is feasible to contribute up to $11,000 a year without the federal gift tax kicking in. Couples can contribute up to $22,000 per year. For those who want to seed these accounts quickly, a single contribution of $55,000 for an individual or $110,000 for a couple is allowed. The gift tax exclusion will be spread over five years in this case.
The limits of the tax exclusion - It is possible to open multiple accounts in different states on behalf of the same child. When this is done, however, one only gift tax exemption is allowed per state.
The control allowed - Section 529 plans don't force grandparents to give up control of the money. These plans enable account holders, not recipients, to decide when withdrawals will come out and for what reasons. If the need for the account goes away for whatever reason, grandparents can reclaim their funds and pay the necessary taxes on the earnings.
The possibility of a sunset on tax benefits - Section 529 plans may face a change in the tax-free status at the end of 2010 when the laws that created the plans expire. If Congress extends the laws, however, the tax-free status would remain.
The maximum contribution limit - In most cases, the maximum amount of money that can be contributed to a Section 529 savings plan is $250,000.
Saving for a grandchild's education is a great way for grandparents to give youngsters a good start. Thanks to Section 529 plans, it's also an excellent way to protect savings from tax burdens.
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