The California 529 College Savings Plan

The inflation rate of college education has always been a source of great anxiety and tension. This problem was partially resolved with the introduction of new education laws. These laws were introduced as a part of the Educational Plan of 2002, under Section 529 of the Internal Revenue Code. This is actually an amended law of the Educational Savings Plan of 1996. Leaving aside only a few states, you will find that this plan has been implemented in most of the states of U.S.

In California, it is also known as the California 529 College Savings Plan. The 529 college plan is much better than the Coverdell Education Savings Accounts. This plan has flexibility and many options to save on taxes. The percentage of tax incurred upon the saved amount - if withdrawn without expending on the purposes of education - is low. So you can always receive a good percentage of the money back on the saved amount.

The specific laws and the type of plans implemented (there are two different type plans) depend mostly on the enacted legislation of each state that administers them. Each state has been given the freedom to impose their own set of applicable laws, rules, and regulations, as long as they keep all the basic federal laws intact.

One of the more basic precepts of the 529 laws expresses the idea that the savings account can be contributed to by any person besides parents; like grandparents, relatives, or even parent's friends. And in California, you’ll find both types of 529 plans; the Prepaid Plan and the Savings Plan. Among these, the more popular for Californians is the Savings Plan, which even has a growth provision that compensates for market inflation. The tax deduction scheme applicable to 529 laws in California is per the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This legislation has provided income tax relief for “529 California”.

So, you’ll be able to implement a very safe, flexible savings scheme - with complete power of attorney to yourself - when participating in either type of these plans. And if you compare prices and benefits of the 529 laws between other states, you’ll find that the typical Californian enjoys more flexibility and tax benefits than any other.

Some Benefits Of The 529 California College Savings PlanFirst, you have choice: you can choose which type of plan to implement; the prepaid or the savings plan. Most states don’t prefer either one, and allow for both.

Secondly, some plans are state sponsored and some are privately sponsored. So, you’ll find that the better mutual fund companies, insurances companies and even some banks will have their own programs for these educational savings plans. However, always keep in mind that all these specific programs are still subject to certain underlying laws, pursuant to Section 529 of the IRC. Some colleges even administer their own plans, where you can open an account and/or carry on with the savings scheme. For help, all you have to do is contact a planner or plan advisor to help you better understand the intricacies and application of the strategies pertaining to your specific goals.

Thirdly, you have sole authority over the money -- unlike previous educational programs, where the funds were deposited directly into the beneficiary’s account and were therefore subjected to misuse.

Even More Benefits from the California 529 plans4) Under this scheme of investing, the earnings from the savings are exempted from tax by the California Franchise Tax Board. So the distributions/contributions towards these funds are non-taxable, issued under certain conditions.

5) A minimum tax is levied on the total amount after maturity; that is, once the child starts into their college days. The actual tax is attached to the beneficiary’s Tax ID number. The exact amount and/or percentage of tax imposed on the funds depend on the tax laws and rules for that specific fiscal year’s budget.

6) You can invest in a fund to a maximum of $60,000 for individuals and $120,000 for couples in any given year -- without paying any gift taxes. In other words, the gifted amount is tax-exempt. This is a pretty strict ruling here, as the rule states that in the next five years, you cannot gift any more money to the beneficiary. Any gifts or contributions exceeding these amounts per each individual/couple will be taxed as per the California state tax rules.

Precautions while signing up for a new accountSome of the privately sponsored savings accounts have hidden charges, like; maintenance charges, program management fees, and other expenses attached to the underlying savings. These charges can be quite high in plans run by mutual fund companies, banks, or colleges. So you must read all the terms and conditions and fully understand these private plans before opening an account. For these reasons, many people prefer the state-sponsored programs over the private ones, which are simple and without any hidden charges.