529 Plans are college savings plans that are named for the Internal Revenue Code section that authorizes them. They have outstanding tax benefits and should be considered by every family.
The assets in 529 Plans grow tax free, so you benefit from compounding (like the credit card companies benefit from compound interest). You earn money on your contributions and their growth.
In addition, the 529 Plan asset distributions are tax free when you use them for qualified educational costs like tuition.
There’s a great website (www.savingforcollege.com) where you can learn a lot more and compare the numerous state plans. You don’t necessarily have to be a resident of a particular state to participate in the plan; many are open to a resident of any state.
Consider the fees and tax benefits when choosing a plan. For example, there may be set up fees, account maintenance fees, and investment fees. While the federal income tax benefits are the same for each plan, the state income tax benefits may differ. For example, some state plans allow their residents to avoid the state income tax on withdrawals.
Minimum contributions are truly minimal so you can most likely meet the minimums. In addition, if you want to superfund the 529 Plan, you can do that too. For example, you can use your annual gift tax exclusion to fund 5 years worth of exclusions at one time. This would be up to $65,000 for each 529 Plan beneficiary. If you’re married, the annual gift tax exclusion for 5 years is $130,000.
You can set up as many 529 Plans for as many individuals as you would like (i.e. all of your grandchildren.) In addition, aunts, uncles, parents, and others can all contribute to the same plan you set up.
You do have to invest cash; you cannot transfer investments into a 529 Plan.
To determine how tax free 529 Plans fit into your overall estate plan, consult with a qualified estate planning attorney.