Paying for college can be daunting. To soften the hit on your wallet, consider a 529 college savings accounts for the prodigy.
These type of accounts are typically set up by parents or grandparents with a specific future student named as beneficiary.
It is a good idea to name a successor owner in case you pass away before the child finishes college.
Some people worry about the child running off with the money rather than using it for studies. Fortunately, 529 accounts are owned by you, so you control the distributions from the account.
In this case, you could either transfer the money to a 529 account for another family member or cash it out. If you cash it out, you may owe taxes and penalties on any growth of the money.
A recent rule change added spending flexibility. One can now draw up to $10,000 per year to cover private school for kindergarten through 12th grade.
From a tax standpoint, these accounts are similar to Roth IRAs, except the purpose is to pay for college.
You do not get a federal tax deduction for the contributions, but, provided you later spend the money on eligible college expenses for the named beneficiary, you also do not pay taxes on any growth of the money.
In many states, you may get a state income tax deduction. Here in Virginia, you can deduct up to $4,000 per student per year. If you contribute more, you can carry such amounts forward to future tax years.
If you are 70 or older, there is no dollar limit on the state income tax deduction in Virginia.
One other tip: distributions from 529 accounts owned by grandparents count as the student’s income in the year of distribution.
This may prevent the child from qualifying for financial aid. To mitigate this, the grandparent could consider drawing from the account for the last two college years, as some student aid formulas use income data from two years prior when determining aid eligibility.
As always, don’t let the details stop you from saving. Every dollar you set aside for college likely will be of great help one day.
Jorgen Vik is a certified financial planner and partner with SKV Group LLC.
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