1. Do I have to pay taxes on the money I put in the account? The short answer is yes, but you do not have to pay taxes on the growth the money has in the account nor do you pay any taxes when it is deposited. Sometimes, states will waive state income tax on 529 plan deposits, but you will have to look at the rules on your own state to find out if you are eligible.
2. What can I use the money for? Funds in a 529 account can only be used for IRS-specified educational expenses or you will have to pay a penalty. These expenses include tuition, room and board, and class fees at any accredited university, college, or vocational training program. These accounts cannot be used to pay for transportation expenses, extracurricular activities, or general living expenses.
3. Who can contribute to the account? Saving in a 529 can be done by any relatives or friends of the student. There does not have to be a direct family relationship in order to set up a 529 account for someone. Furthermore, multiple people are allowed to contribute to the same account, and a student can have multiple 529 accounts. Having multiple contributors to the same account, however, will require every contributor to have all of the account information.
4. What kind of investments can I have in the account? A 529 account can hold investments such as stocks, corporate bonds, government bonds, CDs, or even cash. Most plans cannot accommodate investments such as real estate and commodities.
5. What happens if the beneficiary gets a scholarship? In the event that you or your child has some or all of his higher education paid for through a scholarship, the owner of the account is allowed to withdraw money that is the equal to the amount of the scholarship without paying a penalty. For example, if a child gets a $5000 a year scholarship, the owner of the 529 account can withdraw $5000 a year from the account penalty-free.
These accounts can be a great way to save for someone’s college education. Like any investment, however, make sure that you understand it completely before signing up.
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