529 Plan Rating Helps Make Better Investments

The 529 plans, though already very popular, are too new to make any definite practical revelations yet. Some financial agencies are pursuing their progress and trying to come up with some 529 plan ratings, made on a state-wise basis, but we must take them with a pinch of salt.

Anyways, the 529 plan rating providers have come up with ideas on how better savings can be made on the plans. The 529 plan is a tax-advantaged savings or prepaid scheme for college education. Parents, or any other family adult, can make an account with these plans for children and then pass on the amounts to pay for the child's college education. Already the 529 plan ratings show the significant benefits of these schemes over traditional plans like Coverdell. With a 529 plan anyone can make the investment, the account can be closed or the amount can be withdrawn with minimum penalty, the account is transferable from one beneficiary to another, and there is a good deal of tax savings. These are the prime benefits that are making the 529 plans popular.

Here are the tips on savings that are provided by people who make the 529 plan ratings:-

Plan for gift exemption - A 529 plan, which is to the tune of $60,000 a year, is equivalent to five equal annual gifts made to the beneficiary. That means, if the accountholder makes no other gifts to the beneficiary in the span of these five years, then the amount invested in the 529 plan will remain free from gift tax. The best benefit here is that the total gift exemption of the accountholder towards the child will not diminish.

Plan for saving withdrawal penalties - Withdrawal penalties come into the picture in many situations with 529 plans. One of this situation is when the accountholder withdraws the funds from the investment plan for a reason other than paying for the tuition fees of the beneficiary. This can happen if the beneficiary does not attend college, or if he or she gets a scholarship that pays for the tuition fees. Money withdrawn for reasons other than paying for tuition fees is called as unqualified withdrawal. Such unqualified withdrawals will attract income tax and a 10% penalty on the amount withdrawn. However, with a 529 plan, these penalties can be avoided by the simple act of transferring the benefit from one beneficiary to another. So, if the original beneficiary does not want the investment for paying tuition fees, you can pass it on to another relative, and keep enjoying all the tax benefits.

Plan for saving tax - Accountholders of 529 state plans can direct the benefits to their own accounts, to the accounts of the beneficiaries, or even directly to some educational institution. There is good choice here. Hence, the accountholder can decide which of these options will have to pay the least tax. If the beneficiary's marginal tax rate is lower, the benefits can be passed on to the account of the beneficiary.