What Is a 529 Plan Contribution?

The minute your baby is born, you understand that he's special and probably the smartest child in the world. You want all the advantages for him, but you worry that your income isn't enough for college tuition. It's time to start making 529 plan contributions for your child. These plans offer a way to save periodic small amounts in investments so they have the advantage of time to help them grow.

History

The plan started not as a bill about college, but legislation for the small business. Later congress changed it in the Taxpayer Relief Act and finally by the year 2001 Congress refined the 529 Plan to what it is today.

Features

Compare it to the Coverdale plan, the educational IRA, and note it has marked differences from that plan. The first is the amount of money that you can contribute. The gift tax rules set the contribution limits for each individual's contribution to one person, no more than $12,000 per year. The plus is that you can do a fast-forward of $60,000 in one lump sum and remove it from the contributor's estate. You can have several different state plans with different owners. Coverdale plans only allow contributions of $2000 per individual.

Time Frame

Use the Coverdale plan before the beneficiary becomes 30. The plan belongs to the beneficiary when they turn 18 and used as they choose. Of course, if it's not for education expenses then there's a 10 percent penalty on the growth. The College 529 plan contributions remain in the control of the contributor and passes to another child or member of the family if the plan's owner chooses to change beneficiaries. You also can name an alternative owner if you pass away. If you put away money for your grandchild's college and their parent went back to college in the meantime, you can transfer the assets to the parent. There's no limit on age. You can start a 529 Plan for your self and go to the school of "warm" in the winter months of your retirement on a tax-free basis

Size

Limit the amount to around $300,000 for 529 plan contributions. Most plans have a high limit where they no longer accept contributions. Usually the limit is the amount that the state feels is just enough to pay for college.

Geography

Select a plan in any state for the 529 Plan contributions. If you don't like the plan that your state adopted, use another state's plan. You often miss the tax deduction for your state, but sometimes the reduction of fees makes it worth the money you'd save on taxes.

Types

Choose the investments or select the automatic section. Some plans don't allow you to select how you want your investment money divided. Most do however, but offer an automatic investment option based on the child's age. When the child gets older and close to college age, the investment automatically becomes more conservative and during the time they would attend a school, is in a money market fund.

Considerations

Pay no taxes on the growth if you use it for expenses. You can remove the funds and don't need a reason, but save those receipts for your taxes, so you can prove it was legitimate or you pay a 10 percent penalty and taxes on the growth. Remember the school that your child attends could be a trade school. Some foreign schools are also included.