<p>I am going to graduate school next year and I'm contemplating opening a 529 savings plan to take advantage of pre-tax contributions. Does anyone here have experience with this? Is there anything I need to watch out for? From what I have read the pre-tax contributions are not taxed when withdrawn if they are spent on tuition/qualifying room and board/books/etc., but that sounds too good to be true. I'm also concerned about losing money since the investment is not guaranteed. I live in New York, if that matters. </p>
<p>Though I am not a parent, I am posting in the parents forum because I assume you all know more about saving for education than most students! Sorry if this isn't allowed. Thanks in advance for your help.</p>
<p>The rules vary a bit state to state but, i believe you are wrong about contributions being ‘pre-tax’. All the plans I’ve seen require you to contribute post tax dollars. Withdrawls, including gains and income may be withdrawn for educational purposes without taxation. </p>
<p>They can be a good vehicle for accumulating gradual deposits over an extended time period. They also have special grand-parent provisions for estate planning. </p>
<p>Unless you plan to deposit a good chunk of change and let it sit for a while, I’d say it’s not worth the hassle.</p>
<p>Some states allow a state income tax deduction for money put into a 529. In my state of PA, that means you make 3% off the top of whatever you put in. PA. does not require that the money sit in the account for any length of time, so you can deposit the money in May and pay it out in August, and get the tax break.</p>
<p>Most 529s offer a range of alternative investments, including very conservative ones.</p>
<p>Some states only offer tax benefits if you invest in a 529 in your own state.</p>
<p>The fees for 529s vary greatly from state to state. High fees can eat up much of your returns. One of the 529s with the lowest fees is the Vanguard 529 in Nevada. You can find online comparisons of 529s from various states.</p>
<p>Saving for college can be simple with a 529 college savings plan. These plans are state-sponsored programs with the goal of helping parents save for their child’s education expenses. However, for the past couple of years, there has been a lot of discussion about how Americans aren’t saving much money or at least not putting it aside. Even if individuals were to up the rate of [url=<a href=“Personal Money Network”>Personal Money Network]savings[/url</a>], inflation rates have virtually made it an unnecessary exercise.</p>
<p>Actually, since its so hard to get good returns on investments, saving is even more important than ever, since you can’t expect good returns to buoy smaller savings into larger amounts. </p>
<p>Do you know where you plan to attend grad school? Sometimes there is advantage in having your 529 in that state, I believe.</p>
<p>Contributions to a 529 come from after-tax dollars, at least as far as the IRS is concerned. Many states just piggyback off that and don’t give you any tax break on the funds you deposit. New York allows you to deduct up to $5,000 in contributions annually from your taxable income for state income tax purposes–but there is no federal income tax deduction. The main advantage is that your investment grows tax-free (well, technically tax-deferred), and withdrawals are tax-exempt at both the federal and state levels if you apply the money to qualifying education expenses, including tuition, room & board, and books.</p>
<p>We’ve been contributing to 529s for our daughters for years through automatic monthly transfers from our checking account. It’s a painless way to save for college, and you can accumulate a nice sum if you keep at it long enough. </p>
<p>I’m not sure there’s a big advantage to a 529 if you’re saving to send yourself to grad school in just a few years, however. Even if you take the maximum $5,000 deduction from your NY state taxable income, that’s going to be worth at most only a few hundred bucks to you (exactly how much depends on your marginal state income tax rate). Vanguard, which administers NY’s plan, charges an account management fee of $1.70 per $1,000 per year, which is fairly modest but it still adds up. And there are stiff penalties if your plans change and you need to withdraw those funds for some other purpose. I guess if I were thinking about going to graduate school in a few years, I’d just set up a disciplined after-tax saving and investment program, and have the flexibility to use those accumulated savings for any purpose–going to school, buying a house, starting a business, whatever.</p>