There are two distinct parties involved in a plan — the account owner and the beneficiary. The account owner is the person who opens the As the account owner, this person manages the college saving plan: selecting or changing the beneficiary, selecting the investment options, making withdrawals, terminating the account, and receiving withdrawals if no other person is designated. The account owner also makes contributions to the account, but others can help, too.
Alternately, if funds remain in the plan after a child has finished school, a younger family member can be named as the beneficiary for the balance. There are no tax issues if the transfer is within the same generation or an older generation of the family, such as changing the beneficiary to a sibling of the original beneficiary.
However, if the transfer is to a beneficiary in a younger generation, the transfer is considered a taxable gift from the old beneficiary to the new beneficiary, and a gift tax return will need to be filed. Are You Ready To learn more about how wf can help you? Unlike savings plans, prepaid tuition plans do not cover room and board. Prepaid tuition plans may have other restrictions, such as which particular colleges they may be used for.
The money in a savings plan, by contrast, can be used at just about any eligible institution. You aren't restricted to investing in your own state's plan, but doing so may get you a tax break, so check out that plan first. The earnings in a plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses. The money you contribute to a plan isn't tax-deductible for federal income tax purposes.
However, more than 30 states provide tax deductions or credits of varying amounts for contributions to a plan. In general, you'll need to invest in your home state's plan if you want a state tax deduction or credit. If you're willing to forgo a tax break, some states will allow you to invest in their plans as a nonresident.
The owner typically you may transfer to another plan once per year unless a beneficiary change is involved. You are not required to change plans to change beneficiaries. You may transfer the plan to another family member, defined as:. As with other kinds of investing, the earlier you get started, the better. With a savings plan, your money will have more time to grow and compound.
With a prepaid tuition plan, you'll most likely be able to lock in a lower tuition rate, since many schools raise their prices every year. If you have money left over in a plan—say the beneficiary gets a substantial scholarship or decides not to go to college at all—you'll have several options. One is to change the beneficiary on the account to another relative, as financial advisor Jay Murray describes in the box above.
Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school. Securities and Exchange Commission. Internal Revenue Service. Accessed July 7, Saving For College. Your Privacy Rights. If something were to happen to the owner, this person would step in to own and manage the plan with no tax impact to them as the new custodian.
If something happens to both the owner and contingent owner simultaneously, the estate plan would dictate next steps. Most advisors recommend a spouse, the parental custodian, or the student as the successor owner and in many circumstances this makes the most sense. Knowing distribution plans as the student beneficiary gets closer to college age makes determining a successor owner a bit easier.
Read more articles by Sarah Mouser. Who Should be the Owner of a Plan? Membership is now required to use this feature. To learn more: View Membership Benefits.
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