It is no secret the price of tuition keeps getting higher, and many college graduates are burdened with costly student loans. As a parent, you can take the burden away from your child by setting up a 529 college savings plan for him. It is an education savings plan that is intended to help families pay for college tuition. Enrolling in this plan can help your child save a lot of money on tuition costs and offer you many tax benefits. Here are some of the tax benefits a 529 plan offers.
State Tax Breaks
The state you live in might offer a few tax breaks for having a 529 plan including income exemption on withdrawals and an upfront deduction for your payments. Be sure to research what tax benefits you will receive before you choose the type of plan you want.
Federal Tax Breaks
While you are not allowed to deduct your contributions on your federal tax return, they will be tax-deferred. This means that you do not have to worry about paying taxes on your 529 college savings plan when you have to make withdrawals.
Here are some very helpful tips for maximizing the federal tax benefits.
Do not Avoid Contributions During Bad Stock Market Years
Avoiding contributions to a 529 plan during bad stock market years might seem like a wise idea, but it can actually do more harm than good. If you avoid contributing, it will prevent investment growth. You should contribute to the savings plan every year, regardless of how well the stock market is doing. The investment might not grow as fast as some years, but no one can time the market and being consistent with your contributions is important.
Time Your Contributions and Deductions
It is very important to time your contributions and deductions carefully to get bigger tax breaks. The majority of states will match the tax year you make a deduction with the year you make a contribution. However, some states have an April 15 deadline to turn in your taxes, so you can make extra contributions. For example, if you make an extra contribution in the beginning of 2015, you can include that in your 2014 tax deductions.
If you want to let family members contribute to your child’s 529 plan, you should consider e-gifting. This program is available in several states and can help your child receive extra tuition money. After you sign up for an account, give your family members links so that they can make direct contributions to the account. However, if a relative contributes to the fund, he will get the tax break. This might make it easier for him to make even more contributions.
As you can see, a 529 college savings plan will help your child pay for college and may give you tax breaks.