Each new school year seems to bring news of rising college costs and student debt loads, which can cause even the most prepared parents to worry. How about some good news for a change?
Earlier this year, Gov. Nathan Deal signed a new law doubling the deduction taxpayers can claim for contributions to the state’s Path2College 529 plan. Beginning in 2017, parents filing jointly can deduct up to $4,000 a year for each beneficiary they’ve set up a plan for. A parent filing as single or head of household can deduct up to $2,000 a year.
States and education institutions have offered 529 plans with tax incentives for families to save for college since federal legislation created them 20 years ago. These plans generally have a host of advantages, including the following:
- Earnings of these plans are typically not subject to federal or state taxes when withdrawn to pay for tuition, books, room and board and fees for the student the plan is set up to benefit.
- Funds from the account can be rolled over to another account (for, say, a younger sibling) with no tax penalties.
According to Path2College, the plan currently has more than 134,000 beneficiaries signed up. The IRS recommends setting up your 529 plan sooner rather than later, to allow time for enough earnings to accrue to assist as much as possible in paying for college expenses.
In addition to helping ensure that you can afford college for your kids, contributing to a 529 plan can have tax advantages for your estate. Be sure to discuss this with your attorney or tax adviser when planning your estate.
The IRS cautions that 529 plans aren’t necessarily the best investment option for everyone, and that your state’s plan might not be the best fit for your particular situation, so it’s a good idea to explore all your options before jumping into a long-term investment plan.