Start saving for college now: It will be worth it in the long run

It is a general assumption that the cost of sending a child to a private or state college will go in only one direction in the next twenty years; that direction is expensive. Thankfully, there are effective ways to start saving. Specifically, I want to highlight the benefits of a 529 College Savings Plan.

The main attraction of a 529 College Savings Plan is that the growth in earnings grow federally tax-free when used for costs of higher education. Unlike a taxable account, the compounding of tax-free earnings growth provides a greater potential over the long-term.

There are no deductions for making a contribution. Higher education costs are deemed to be: tuition, fees, room and board (with limitations), books, supplies, and equipment for enrollment or attendance. If withdrawals are taken without satisfying one of these costs, the earnings become taxable at federal, state, and local income tax levels and are penalized by a federal tax penalty of 10 percent.

If you are a New York resident, you may be eligible to receive a tax incentive for making a contribution to the 529 Plan. A resident can receive a state tax deduction of up to $5,000 (up to $10,000 for couples married filing jointly). There are no income limitations on making a contribution to the plan. A person can contribute up to $375,000 to a child’s 529 Plan. In New York, if there is more than one plan for the same beneficiary, the total asset level cannot exceed $375,000.

Even though the assets inside a 529 College Savings Plan are considered gifts for federal gift, generation skipping, and estate tax purposes, the beneficiary who is not the account owner has no control over the assets inside the account. You can gift up to $65,000 (5 times the normal gift tax exclusion of $13,000 per year) in a single year for each beneficiary without incurring a federal gift tax (providing no other gifts are given). Married couples filing jointly can gift up to $130,000 per beneficiary.

In the event that the beneficiary does not go to college, the owners of the account can transfer the registration to another child or family member. The owner can even transfer to themselves in the event they want to take college courses.