San Diego, California (NAPSI) - College can be expensive but it can also pay off in two ways. First, college graduates earn, on average, nearly a million dollars more over a lifetime than non-college graduates, the Census Bureau reports. Second, the money you invest now for a future college education may enjoy tax-free growth or other tax advantages. Here are seven smart reasons to save:
1. Tax-free distributions. When 529 college savings plan funds are used for qualified higher education expenses-tuition, room and board, books and so on-the earnings portion of any distributions used for such expenses may be free from federal and many state income taxes.
2. State tax deduction. Some states allow residents to claim a state tax benefit. For example, Wisconsin taxpayers’ contributions to Wisconsin 529 plans may reduce their state taxable income up to $3,000 per beneficiary per year.
3. Gift and estate planning. The value of a 529 college savings account is not considered part of your estate. Plus, the money may be given as a gift of up to $14,000 a year ($28,000 per married couple) to help you reduce the taxable value of your estate.
4. Get the whole family involved. Parents, grandparents, great-grandparents, aunts, uncles and friends can open and contribute to new 529 college savings accounts or an existing one. Family members may also be able to take advantage of state tax deductions.
5. Contribute consistently. Consider setting up automatic withdrawals from your checking or savings account to maintain a set schedule. Or research whether your employer offers the opportunity to contribute via payroll deduction.
6. Understand the tax benefits of all your options. Just like your future college student has many choices of schools, you have choices in college savings options. While 529 plans offer powerful tax advantages, be sure to evaluate other common college savings options, such as Coverdell education savings accounts, IRAs, custodial accounts, education savings bonds, and taxable accounts.
7. Keep track of college savings trends. Use free online resources such as CollegeSavings.org, SavingforCollege.com and your state’s 529 plan website to help keep you current on college savings news, tax benefit updates and trends. For further information on federal tax treatment of 529 plans, see IRS Publication 970 or consult your tax adviser. You can also check out Wisconsin’s official college savings plans, Edvest and financial adviser-sold Tomorrow’s Scholar.