Published Tuesday, May 24, 2016 at: 7:00 AM EDT
If you're worried about saving money for your children's college educations, you should investigate Section 529 plans. These tax-favored accounts enable you to sock away money that can grow without current taxes. And the funds you withdraw to pay most college costs are also exempt from income tax.
Section 529 plans are operated by states, and although each state has its own ceiling for contributions, most limits are well into six figures.
But there's one catch. When you contribute money to a Section 529 account on behalf of a child or grandchild, the transfer is subject to gift tax rules. The current annual gift tax exclusion is $14,000 per recipient, or $28,000 for a joint gift by a married couple. If you give more than that amount, the excess will reduce your lifetime exemption from gift and estate taxes.
Fortunately, tax rules let you make a one-time contribution to a 529 plan that is treated as if you gave the money over five years. Thus, you can provide the equivalent of five years' worth of contributions in one year—so, up to $70,000, or $140,000 from a couple—without gift tax issues. You won't be able to give additional funds for five years without affecting your gift and estate tax exemption, but even those amounts might cover most or perhaps even all of a beneficiary's education costs.
Don't forget about this unique gift tax break when planning how to meet college expenses.
This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.
An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.
Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
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