Section 529 College Savings Plan Contributions Are Tax Free Investments In Your Child's Future

Anyone, regardless of their age and income level, can make contributions to the Section 529 college savings plan which is under an Internal Revenue Code Section 529. Contributions are made on behalf of a beneficiary related to the contributor.

Although anyone can participate in the section 529 college savings plan, there are three limitations to consider before making contributions: gifting limit, special gifting provision, and account limit.

Gifting limit. The section 529 college savings plan does not have an annual contribution limit. However, there is a federal gift tax exclusion which allows contributors $12,000 exclusion per beneficiary. The amount doubles to $24,000 for married couples.

Special gifting provision. A contributor can pay up to five years, or $60,000 of the annual $12,000 gift at one time, rather than pay annual amounts. Married couples are allowed to contribute up to $120,000. This special gifting provision in the section 529 college savings plan is not available with other types of estate planning vehicles. Form 709 must be filed with the IRS in order to take advantage of this provision.

Account limit. New contributions are not allowed once the combined contributions and earnings limit is reached. This helps to prevent accumulating more money than is needed.

The section 529 college savings plan is not tax deductible for federal income taxes. However, some states provide a deduction or tax credit for participants who live within their state. The earnings accrued on contributions to a section 529 college savings plan are not federally taxable as long as the funds remain in the account.

Distributions remain tax free as long as the funds are used for qualified higher education expenses at an eligible institution. Tuition, books, supplies, equipment, and room and board are considered qualifying higher education expenses. Income tax and a 10 percent penalty will apply to distributions from a section 529 college savings plan that is not used for a qualified expense.

There are a few exceptions for distribution penalties. If the beneficiary dies, the beneficiary becomes disabled or receives a tax-free scholarship or other educational assistance allowance by the beneficiary which exceeds the distribution amount, a penalty will not be accessed.

There are other unique benefits and features which make the section 529 college savings plan a good investment vehicle. Contributions are considered gifts to the beneficiary and are not counted as assets of the account owner's estate. The account owner controls the account for as long as the account exists. Thus, parents can guarantee their child will not spend the money elsewhere, and the funds will cover education expenses.

This college savings plan is a viable planning tool for parents to send their child to college and invest in the child's future success.