(KGTV) - Relatives who want to help children pay for a college education can start at birth by opening a 529 plan.
10News breaks down the rules in California as we look at ways to make it in San Diego.
WHAT IS A 529 ACCOUNT?
The plan, named for the IRS tax code, allows for tax-free growth in an educational savings account. Financial advisors recommend you open the account for a child when they’re young to give the account time to grow. There is no age limit, so the account can be opened when the child is born.
Account holders can choose from a variety of portfolio options based on age and security level, according to Merrill Edge.
HOW MUCH CAN I CONTRIBUTE?
You must open an account with at least $25. California 529 plans allow you to contribute up to $15,000 per year per beneficiary without federal gift taxes. Although 529 investment growth is not subject to taxes, California residents do not get state or federal tax breaks on 529 contributions.
You can take out an account in any state regardless of where you live. Some states match a percentage of money saved by relatives. In California, the Matching Grant Program will give families making less than $75,000 annually up to $225 in contributions.
The 529 account contributions have a cap of $529,000. After that amount, the account balance can continue to grow.
WHO IS ELIGIBLE TO CONTRIBUTE?
Any relative through blood or marriage can open or contribute to a 529 plan. The owner of a 529 account does not have to be a parent. They remain in control of the account when a student becomes an adult but can transfer it to another beneficiary, including a younger child or another adult. You can also open a 529 account for your own education expenses.
HOW CAN I USE THE MONEY?
You can make withdrawals for expenses like fees, books, and tuition without being taxed. If you use the money for other purposes, it will be taxed as income and subject to a 10 percent additional federal tax, as well as a 2.5 percent additional income tax in California.
You can also use 529 funds of up to $10,000 per calendar year per student for tuition at a private or religious school.
MY STUDENT RECEIVED A SCHOLARSHIP. WHAT NOW?
If your student receives a substantial scholarship, you can withdraw an amount equal to the scholarship from the 529 plan without incurring the 10 percent additional federal tax. The 529 fund can also be transferred to another person.
WHAT ARE THE DRAWBACKS OF A 529 PLAN?
There are reasons you might not want to contribute to a 529 plan. Forbes advisors recommend you pay off debt, build emergency savings and contribute more to your employer’s retirement account, including a 401K, before you consider putting money into 529 savings.
For more information about 529 accounts, check out the ScholarShare529 website.