Clock Is Ticking On 2006 529 Plan Tax Savings

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J. Steven Tucker

J. Steven Tucker is a Certified Public Accountant. He has had his own CPA practice in Winston Salem NC since 1987. His areas of practice include financial planning as well as tax planning. Also, for several years now, he has been trading commodities.

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With less than a month now until 2007, it's very important not to let any opportunities for tax savings slip by. One great tax savings vehicle is a college savings account known as a 529 Plan. On the federal level, contributions to a 529 Plan are not tax deductible, but investments into the plan are allowed to grow tax free and withdrawals are tax free if the money is used for qualifying college expenses. In addition, some states now, about thirty, allow a deduction for state income taxes for contributions made to 529 Plans. However, in most of the these states, contributions must be received by the December 31 of the year in which you wish to take the deduction. But, be aware that because December 31, 2006 is a Sunday and a non-business day, the states are requiring that contributions intended for 2006 be made no later than December
29, 2006. Contributions received after that will be counted for 2007.

The main thing to be aware of is that 529 plans are set up and managed by the individual states so the rules can vary somewhat from state to state. For example, some states, like North Carolina, have income limits to be able to take the upfront deduction on state taxes. Other states have no limits.

In addition to the tax advantages of 529 plans, there are some other advantages as well. One advantage is that the owner of the 529 Plan stays in control of the funds. Another advantage is that there is no managment of the 529 plan by the owner. The plans are managed by the individual state treasurer offices. Another advantage is that the funds can be withdrawn at any time, no questions asked, but if the funds are not used for qualifying educational expenses, there will be a 10 percent penalty on the withdrawn funds plus regular income taxes to pay on the earnings. Another advantage is that a 529 Plan can be set up for anyone - a spouse, a child, a friend, a friend's child, and even yourself.

You can set up a 529 Plan in any state without having to be a resident of that state. However, most of the states limit the state tax benefits to residents of that state.

So, while there is still time, you may want to check out the advantages of a 529 Plan. You can go to www.saving for college.com for more information.