Rising tuition costs prompt more to consider 529 savings plans

The economic downturn continues to affect the real estate market, investment industry and retail sectors, but the financial crisis has also had an adverse impact on another area: Education. More colleges are losing endowments and donations from wealthy alumni and organizations, forcing them to eliminate scholarships and raise tuition prices. In response, more parents are considering investing in a 529 college savings program to make the costs of an education more affordable.

A 529 savings program is a fund operated by a state or educational institution that allows investors place funds in an account to pay for qualified education expenses. Although plans and terms vary from state to state, students are generally not limited in which school they choose to attend by the state in which the plan was established. This means a student who is a resident of South Carolina and has a 529 savings plan may still apply to a university in Massachusetts. Additionally, parents do not have to choose a plan that their state offers, meaning they may live in North Carolina, invest in a South Carolina plan and send their child to a school in California, educational website Savingforcollege.com reports.

Many parents choose this savings option for a number of reasons, one of the first being the tax benefits of the program. Individuals may invest funds into a 529 savings plan, which will grow in a tax-deferred account, with distributions being virtually free from federal taxes, according to the Web site. Individuals will also not receive a 1099 form to report earnings until the year in which they begin making withdrawals. Different states may also offer their own tax incentives and benefits to investors. However, these tax breaks vary significantly and potential investors should explore each state’s policies or consult a tax professional to learn about the different benefits available.

Parents also have other options when it comes to reducing the costs of their child’s education. For example, the American Opportunity Tax Credit, which replaced the Hope Credit for 2009 and 2010, allows parents to receive a credit of up to $2,500 for qualified education expenses. The credit will also be extended through the 2011 and 2012 filing seasons. In addition to tax credits, individuals may also make early withdrawals from their IRA to pay for qualified education expenses without incurring a 10 percent tax penalty.

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