Many military families have been about to take advantage of the Post 9/11 GI Bill benefit, which allows certain service members to transfer GI Bill benefits to their spouse and/or children. For more information about the ability to transfer Post 9/11 GI Bill benefits, visit this website. Sometimes it may not cover the full amount for dependents, if there are several children in a family, or if the servicemember or spouse has already used the benefits, so families may be looking for other ways to save for college.
If and why you help your children pay for higher education is a personal decision. Since there are no loans for retirement, I always recommend that as your savings priority. There are plenty of options to help pay for school. Personally, we have told our children we will assist with paying for college, and they each have a portion of the transferable Post 9/11 GI Bill benefits, but that they will also be responsible for paying for a portion of their higher education.
One way to help pay for higher education is with a 529 Plan. Named after the section of the Internal Revenue Code under which they fall, 529 Plans are a tax advantaged way to save for college expenses. Set up similar to a Roth IRA, they have a lot of advantages, such as tax-free growth if earnings are withdrawn to pay for higher education and the ability to transfer to another beneficiary that is a member of the family without penalty. In addition, if you are legal resident of the state in which you set up a 529 Plan, many offer deductions on your state tax return for contributions to the state plan.
Here are some frequently asked questions and answers about 529 Plans, taken straight from the source, the IRS,:
Q: What is a 529 plan?
A: A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.
Q: What is the main advantage of a typical 529 plan?
A: Earnings are not subject to federal tax. They are generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, and room and board. Contributions to a 529 plan, however, are not deductible.
Q: How long have 529 plans been around?
A: Congress created them in 1996 and they are named after section 529 of the Internal Revenue code. “Qualified tuition program” is the legal name.
Q: Can anyone set up a 529 plan?
A: Yes. You can set one up and name anyone as a beneficiary — a relative, a friend, even yourself. There are no income restrictions on you, as the contributor, or the beneficiary. There is also no limit to the number of plans you set up
Q: Are there contribution limits?
A: Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts to a particular beneficiary exceed $14,000 during the year. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
Q: Are there different types of 529 plans?
A: There are two basic types: prepaid tuition plans and savings plans. ach state has its own plan, and each is somewhat unique. States are permitted to offer both types. A qualified education institution can only offer a prepaid tuition type 529 plan.
Q: Am I restricted to my own state’s 529 plan?
A: No. Your state’s 529 plan may offer incentives to win your business, but the market is competitive and you may find another plan you like more. Be sure to compare the various features of different plans.
Q: Who controls the funds in a 529 plan?
A: Whoever purchases the 529 plan is the custodian and controls the funds until they are withdrawn.
Q: Each 529 plan account has one designated beneficiary. What does that mean?
A: A designated beneficiary is usually the student or future student for whom the plan is intended to provide benefits. The beneficiary is generally not limited to attending schools in the state that sponsors their 529 plan. But to be sure, check with a plan before setting up an account.
Q: Can I change the beneficiary of a 529 plan I have already set up?
A: Yes. There are no tax consequences if you (the owner) change the designated beneficiary to another member of the family. Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary, or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.
Q: What is an eligible educational institution?
A: An eligible educational institution is generally any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.
Q: I have not set up a 529 plan for my child. Can I start one now and take advantage of the computer benefit?
A: You can start one anytime. But the benefit of a 529 plan comes with the tax-free withdrawal of earnings that build up in the plan based on the contributions made. Like other types of savings accounts, earnings are usually a function of time. A 529 plan which is set up while the student is already enrolled in college, or in other postsecondary education, may not accrue enough earnings to be of immediate benefit. However, that doesn’t mean that such a student wouldn’t benefit from a 529 plan as his or her postsecondary education continues.
Q: Is setting up a 529 plan for my child right for me?
A: Only you can figure that out. 529 plans are not for everyone, and are also not the only option available for paying for college. Setting up a 529 plan is an investment decision, which means both the benefits and drawbacks must be considered, along with alternative ways of accomplishing the same thing. There are many independent sources of information on 529 plans. Also, you may want to consider consulting a trusted tax professional or financial planner.
In addition, unlike federal education tax credits, the 529 plan proceeds may be used for the cost of the purchase of computer technology, equipment, internet access, or related services. The proceeds can also be used for reasonable room and board expenses, not to exceed the school’s cost of attendance guidelines.
Visit your state’s 529 Plan website or department of taxation web pages to learn more about state specific options.
Do you feel obligated to pay for your child’s post-high school education?
If so, what’s your plan?