In the past, UGMA's were the way to fund your child's college tuition. Now 529s are all the rage. We all want to fund our child's education as tuition for colleges increase an average of 5.5% a year. So what is the best way?
529s
529s are named after its section of tax code and allow families to save with after tax funds without the earnings being taxed as long as the funds are ultimately used to pay for 'qualified expenses'- tuition, books, room & board, i.e-education expenses. The funds will grow usually free from federal and state taxes. 529s allow most anyone from grandparents to aunts and uncles to family friends to contribute to the account.
You don't have to open the plan in the state you live or the state where the child resides, although you may lose a chance at a state tax deduction by choosing an out-of-state plan. Almost all states have their own plan and they can differ greatly. There are many sites out there that compare the states' plans. Check out Savingforcollege.com.
As for the state tax deduction, thirty-three states and the District of Columbia give residents a state tax credit or deduction if they invest in their state’s 529 plan. Five states — Arizona, Kansas, Missouri, Montana and Pennsylvania — offer a state income tax deduction to residents for any state 529 plan contributions.
It is also a good way for grandparents to bequeath assets while still alive. Since few states allow a tax deduction to another state's 529, an easy solution is for the grandchild to have multiple 529 accounts with different owners. So grandpa can create an account for his grandchild and receive the state tax deduction. Meanwhile mom and dad can create another account for the same grandchild and deduct any contributions they make
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