College can be expensive but it can also pay off in two ways. First, college graduates earn, on av-erage, nearly a million dollars more over a lifetime than non-college graduates, the Census Bureau re-ports. Second, the money you invest now for a future college education may enjoy tax-free growth or other tax advantages.
Here are six smart reasons to save:
1. Tax-free distributions. When 529 college savings plan funds are used for qualified higher educa-tion expenses—tuition, room and board, books and so on—the earnings portion of any distributions used for such expenses may be free from federal and many state income taxes.
2. State tax deduction. Some states allow residents to claim a state tax benefit. For example, Wis-consin taxpayers’ contributions to Wisconsin 529 plans may reduce their state taxable income up to $3,000 per beneficiary per year.
3. Gift and estate planning. The value of a 529 college savings account is not considered part of your estate. Plus, the money may be given as a gift of up to $14,000 a year ($28,000 per married cou-ple) to help you reduce the taxable value of your estate.
4. Get the whole family involved. Parents, grandparents, great-grandparents, aunts, uncles and friends can open and contribute to new 529 college savings accounts or an existing one. Family mem-bers may also be able to take advantage of state tax deductions.
5. Understand the tax benefits of all your options. Just like your future college student has many choices of schools, you have choices in college savings options. While 529 plans offer powerful tax advantages, be sure to evaluate other common college savings options, such as Coverdell educa-tion savings accounts, IRAs, custodial accounts, education savings bonds, and taxable accounts.
6. Keep track of college savings trends. Use free online resources such as CollegeSavings.org, Sav-ingforCollege.com and your state’s 529 plan website to help keep you current on college savings news, tax benefit updates and trends. For further information on federal tax treatment of 529 plans, see IRS Publica-tion 970 or consult your tax adviser. You can also check out Wisconsin’s official college savings plans, Ed-vest and financial adviser–sold Tomorrow’s Scholar.
For further facts and to compare college savings options, visit www.edvest.com and www.tomorrowsscholar.com.