Section 529 Plans

Named after a the specific IRS code that permits their use, Section 529 plans are considered one the best options for saving towards an individual's future college education costs.  There are two types of plan offered under Section 529: savings accounts and prepaid tuition.  The savings account allows for after-tax contributions to be made for a designated beneficiary (not limited to children).  The contributions grow tax-deferred and potentially withdrawn tax-free for qualified educational expenses.

Advantages include:

  • Tax-deferred growth
  • Potential tax-free withdrawls
  • Parent/donor remains in control of the assests indefinitely, allowing them to close the plan and get their money back (subject to penalties)
  • Provides in-state income tax deductions for 33 different states
  • Shielded from a number of state's finacial aid calculations

Disadvantages include:

  • Pre-college expenses (grades K-12) are not considered qualified expenses

Tax Benefits

The biggest tax benefit of the 529 plan is that is allows for tax-deffered accumulation and tax-free withdrawls.  Unfortunately, there is no Federal tax deduction for putting money into a 529.  All contributions are made with after-tax money and do not lower what you may owe the IRS.  Fortunately, for those with state sponsored 529 plans, your contribution count as an income tax deduction.  It is important to compare your state's 529 plan before choosing an outside 529.

529 Eligibilty

Section 529 plan have the most flexible eligibilty rules of any college savings vehicle.  Basically, anyone can open and contribute to a 529 plan on behalf of anyone else.  There are no age, income, or relationship requirements to the 529 plan.

Contribution

The only contribution limits are "lifetime limits" which are set by each state.  The lifetime limits can range from mid $100,000 to over $300,000 in certain states.  The lifetime limit is meant to keep this account's balance relatively realistic in regards to the actual use of the account.

*Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing

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