Student Loan Dodgers

There are several college savings programs parents and others can use to help fund a child’s college education. Most programs rely on the gift of time to make contributions grow, so if you’re short on time, these options won’t be of much help. On the other hand, if you have several years to save before a child starts college, 529 accounts can be of great value.

The so-called “529 plans” are state-sponsored after-tax college savings programs. Most states have given the gains on these plans special tax treatment, so most or all of the money earned in these vehicles can be used to defray the high cost of a college education. The “529″ refers to the section of the tax code that describes the program and its limitations.

Most states have taken advantage of the Federal tax code and have created savings plans for their residents. There’s no requirement that you participate in the 529 plan associated with your state, but you may receive additional favorable tax benefits if you choose your state’s plan. Favorable treatment could come in the form of additional tax deductions, or tax-free gains on the principal.

A 529 plan can be opened by anyone for the benefit of anyone else, regardless of relationship. The money that’s invested can be withdrawn at any time by the giver with no tax liabilities because the principal investments are all “after-tax” dollars.

The tax code imposes limits on the maximum investment that can be placed in the account, and limits how the untaxed proceeds can be spent. Gains cannot be withdrawn for non-qualified expenses without incurring a penalty. Generally, if the proceeds are used for qualified higher education expenses, there is no penalty on the withdrawal of fund proceeds.

Once you begin to spend the proceeds of a 529 account, you’ll need to keep careful records of your expenses. This includes not only your tuition, but also your room and board costs, books, fees, equipment and other qualified college expenses. You’ll need to account for these expenditures at tax time.