529 California

The educational plans under section 529 of the Internal Revenue Code give an optimum opportunity for US citizens to save a good amount for the future educational expenses of their children. Besides, the contributor to these savings programs receives the federal as well as state tax benefits.

All in all, you can say that the 529 education plans merge the best characteristics of the prepaid tuition programs, custodial accounts, and additional tax-deferred investments plans.

The tax benefits generally vary state wise. Some states provide the complete exemption from state and federal income tax, while the others provide only partial or no state exemption at all. But no state defers any kind of income tax liability until the funds are distributed.

The California Tax Rules for 529 plans are as follows:

1. The tax incentives make these plans most attractive. But California state doesn't offer you a state tax deduction on the contributions, though it follows the basic federal income tax treatment.

2. The expenses covered under qualified higher education include tuition fees, books, supplies, and equipment required by the student for higher education. Room and board expenses are also included in certain conditions. No additional tax is charged for this.

3. The California saving plan offers income tax-free treatment for qualified distributions. Qualified distributions are paid for "qualified" higher education costs to most accredited colleges and universities. It also includes accredited vocational schools, technical schools and foreign institutions.

4. The state provides tax exemption on the earnings from this investment. Until 2010, qualified withdrawals are also free from the federal income tax.

5. However, earnings retained on non-qualified withdrawals are subject to federal income tax, and a 10% federal penalty tax along with state and local income taxes are assessed. Up till 2001, the California state also imposed a 10% state penalty for the nonqualified withdrawals, but there is no such penalty now.

6. Most of the college savings plans in California offer an asset allocation strategy depending up on the child's age. In the younger years, the strategy is generally more aggressive, shifting gradually to the more conservative strategies.

7. The contribution limit is as high as $300,000 and there are no income restrictions on the investments. 8. No gift tax or generation-skipping transfer tax is levied on the investments as long as they are within the normal range of contributions.

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