, or the likely amount a family must pay in college costs, could therefore increase by 20% of the UGMA/UTMA account’s value.Unlike UGMA or UTMA accounts, 529 plans let families allocate funds specifically to college savings. Contributions grow tax-free and you also won’t pay taxes when you withdraw money to pay for eligible education expenses. There are no annual contribution limits, though plans typically institute lifetime contribution limits.
Qualified education expenses include college tuition; fees; on- and off-campus room and board; equipment, books and supplies required for coursework; and up to $10,000 annually for K-12 tuition, depending on the plan. If you use 529 funds for expenses outside these categories, you’ll pay a 10% penalty and income tax on the withdrawal.
But if the child is at risk of not using the funds as planned, you can change the beneficiary of a 529 plan anytime. The plan owner can update the beneficiary to a member of the original beneficiary’s family, which can include their spouse, child, sibling, niece or nephew., a 529 plan is an investment account that lets you place your savings in various investment funds. States manage these plans, and many providers offer age-based investment options, also known as target-date funds.
You can opt for almost any 529 plan, not just your state’s, but you may receive an extra tax break if you choose the plan in your state of residency. On the FAFSA, a 529 plan owned by a parent will be listed as a parent’s asset. That substantially lowers its impact on financial aid. The EFC will likely increase by about 5% of the account’s balance, rather than 20% for a UGMA/UTMA account.
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