Online Mortgage Calculator

A 529 plan is a method of saving on a child’s cost of tuition when going to college. The estimated rate of increase in tuition, room and board, and other fees is approximately 5.7% per year. There are two ways that a parent can help offset these increases. The parent can make arrangements with the college to pay the expenses before the child attends the school. This is a pre-paid Independent 529 plan. The other way the parent can participate in the 529 plan is through a savings investment. The savings are generally invested in mutual funds which often have a percentage gain above that of the rate of inflation.

The Internal Revenue Service (IRS) wrote the guidelines in 1996 and the plan is named after the IRS code where the rules are written. Are 529 contributions tax deductible? When a parent chooses the savings plan the contributions are made with earnings that have already been taxed. Thus, when the funds are withdrawn to pay for educational expenses, there is no tax on the withdrawal. The earnings are not taxed by the IRS, nor is the parent allowed a deduction on the contributions when filing their federal income tax return each tax year.

Each state has a 529 plan that is sponsored by that state. You can use the funds in any college, not just in the state where the plan was sponsored. You also may be eligible for tax write-offs, depending on the state tax rules. The earnings on the investment are tax free, just as they are for the federal tax return. Some states allow you to take a deduction on the contribution if you are using the state sponsored 529 plan. Colorado and New Jersey do not allow any deductions. Connecticut allows up to $10,000 per year, depending on the filing status of the contributor. Arizona allows up to $1,500 per year for joint filing status and $750 for single filing status. You should review your state tax rules or talk with your tax accountant to find out if your contributions will have any benefits for you on your state income tax return.

If you choose an independent 529 plan instead of the state sponsored plan there are several options available and your state may or may not allow a deduction when you file your state tax return. If you do your own plan you can save by not having fees to pay to the administrator of the plan and you will have more to invest in your child’s education.