Parents seeking tax shelter in college savings may invest in qualified state tuition programs, now offered by most states. Under Section 529 of the Internal Revenue Code, such plans enjoy several tax benefits:
- Investment income is not taxed inside the plan.
- When money is withdrawn to pay for higher education, the withdrawals are taxed at the student’s rate, probably only 15%. (Legislation has been proposed to make such withdrawals tax-free.)
- Many states add their own tax breaks, generally through contributions that are deductible from, or withdrawals that are exempt from, state income tax.
Besides the tax advantages and the benefit of keeping ownership of the assets with the parents, there are other issues you need to address: You’ll want a plan with good investment choices and one that imposes few restrictions on where the money may be spent.
