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529 Plan Rules

Retirement plans and saving for education are some of the wisest investment options available. Education is a very costly affair, unless a scholarship is received. The 529 plan is one of the options available for saving towards education – either for self or for children. This plan is perhaps the most valuable investment plan for the average person, in terms of investment for education.

As with IRA rules, there are also 529 plan rules that govern the investment plan. The regular IRA investment growth has the benefit of tax deferment; so also, the 529 plan offers many advantages in this regard. Some of the benefits from this scheme are the tax advantages, exemption from the State financial aid calculations, and also grant and scholarship opportunities among other benefits.

One of the tax advantages that are offered by the 529 college savings plan is that the withdrawals from the account that are used to pay towards higher education expenses are totally free from federal income tax. In some cases, these amounts may also be exempt from the State income tax as well. The term ‘qualified higher education expenses’ includes expenses towards tuition, fees, books and other expenses that are necessary. However, these expenses should be made towards an ‘eligible’ educational institute.

529 Limitations

The 529 contribution limits are something that concerns everyone who would like to invest in these plans. The contribution limits for the scheme are generally set by the State Governments. However, the actual contribution limit is determined by the amount of expense that is necessary to finance the beneficiary for education. In some cases, the contribution can be as low as $25 USD while there are other plans that may require a higher minimum contribution. In any case, it is good to be informed that contributions of up to $12,000 per annum will not attract any federal gift tax in accordance with the annual exclusion.

There are limitations on the total amount that can be invested in a beneficiary’s account over which no contributions will be allowed. This is usually determined by the type of the plan and the State. For example, if the State’s limit is $250,000 and you have contributed $200,000 while the account has earned $50,000, you will not be able to make any more contributions to that account because it has reached its ‘total limit’. This is also generally referred to as the ‘lifetime contribution limit’.

529 Withdrawal Rules

Withdrawal procedures are another important aspect of the 529 Plan Rules. Anyone who invests in the 529 plan should be aware that if the rules for the withdrawal are not followed, then they can incur a penalty of up to ten percent on the withdrawal amount.

The 539 plan rules also provide that if the designated beneficiary doesn’t need the balance of the funds available to him/her, the amount can then be made available to an ‘eligible’ member of the family. For the purpose of the 529 plan, the term ‘eligible family member’ includes the designated beneficiary’s – spouse, son or daughter, stepson or stepdaughter, brother, sister, father, mother, niece, nephew, aunt, uncle, or first cousin. There may be additional ‘eligible’ persons that the term may include, but that depends on the plan.

It is probably best to seek investment advice before starting a 529 plan or any other investment plan to ensure that you get the maximum benefit from the plan.

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