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Liz Weston: Changes to college savings plan rules makes them an attractive choice

Dear Liz: Recently my granddaughter gave beginning to twins. I’d like to put $500 right into a belief for every of them to mature when they’re 18. I’m hesitant to arrange an schooling fund in case they determine not to go on to college. I would really like one thing that features development and security, the least quantity of value and minimal tax penalties. Is there one thing you possibly can advocate?

Answer: A belief could be overkill, given the comparatively modest quantity you’ve got to contribute. Consider as a substitute establishing 529 college savings plans, which give the advantages you’re searching for, together with some flexibility in how the cash is spent.

The cash you contribute might be invested to develop tax-deferred. Withdrawals are tax-free when used for certified schooling bills, which embrace prices at vocational and technical faculties in addition to schools and universities. In addition, up to $10,000 per yr can be utilized for personal college tuition for kindergarten via twelfth grade. If a beneficiary doesn’t use the cash of their account, the steadiness might be transferred to one other shut relative. The account proprietor (you) can also withdraw the cash at any time. You would pay taxes on any earnings plus a comparatively modest 10% penalty.

Legislation handed on the finish of final yr affords an alternative choice: Money that’s not wanted for schooling might be transferred to a Roth IRA, beginning in 2024. After an account has been open at the very least 15 years, the beneficiary can begin rolling cash right into a Roth. The quantity rolled over can’t exceed the annual contribution restrict (which in 2023 is $6,500), and the lifetime restrict for rollovers is $35,000.

These plans are supplied by the states and operated by varied funding firms. You can study extra on the College Savings Plan Network.

Liz Weston, Certified Financial Planner, is a private finance columnist for NerdWallet. Questions could also be despatched to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by utilizing the “Contact” kind at asklizweston.com.