Over the past 20 years, college costs have risen
more than twice the rate of inflation. For many parents, funding
their child’s college education will be one of the largest
and most significant expenses. Therefore, saving money for college
education requires foresight and planning. To start such planning,
a savings goal should be established. The
Free College Savings Planner will help you estimate the
amount of money needed to send your child to a higher education
institution.
The Benefits
This year the Arizona Legislature
established a tax deduction for contributions made to a 529 plan
to encourage Arizonans to save for college. Because the tax incentive
is universal, individuals can contribute to any states' plan and
receive the subtraction.
Beginning in January 2008 Single or head of household tax filers
will receive a $750 tax subtraction for contributions made to a
plan. Couples that are married filing jointly will receive $1500
tax subtraction.
In addition, the federal government
through the Pension Protection Plan of 2006 has made it permanent
for families and individuals to permanently save for college tax deferred. Withdrawals from the 529 plan are
permanently tax exempt under this law as long as funds are used for higher education.
Note: Families are encouraged to consult a tax professional based
on their situation.
What is the power of an early start?
One of the most important factors in reaching your
college savings goals is to start saving early. As the chart below
indicates, the power of compounding can help an account grow faster.
Even if you are starting your savings program a little late, investing
in a tax- advantaged account can help reduce your future college
debt.
This hypothetical example illustrates the future
value of different lump-sum investments and a regular $200 monthly
investment for different periods of time and assumes an annual effective
investment return of 8% compounded monthly. This hypothetical
does not reflect an actual investment or reflect any taxes, fees,
or expenses. If taxes, fees, or expenses had been deducted, performance
would have been lower. This hypothetical is not indented to predict
or project investment performance. Unit price and return
will vary. Periodic investment plans do not ensure a profit and
do not protect against a loss in a declining market. Past performance
is no guarantee of future results. Total gifts to an individual
that exceed the annual deferral exclusionary amount may be subject
to federal gift taxes.
