There are two types of 529 plans, both named after the section of the tax code that exempts them from federal tax if used for qualified education expenses.
The most popular is the 529 College Savings Plan. Every state offers at least one of these plans. Most are administered by large mutual fund companies. You can invest in any state’s plan, but some states offer their residents a state-tax deduction or credit if they invest in the home-state plan.
You must open a separate account for each child, but a child can have accounts in more than one plan. No matter which state sponsors the plan, the money can be used at any eligible public or private college or university.
There is no income limits for contributions. Nor is there an annual contribution limit, but most states limit balances to around $200,000.
There is no tax deduction for contributions, but money in the account grows tax-free and remains tax-free when withdrawn as long as it’s used for qualified education expenses.
Investment options are fairly limited and usually include age-based funds that grow more conservative as the child nears college age.
To compare these plans, go to www.savingforcollege.com or http://www.morningstar.com/529/529Table.html?pfsection=529
Far less popular is the Prepaid Tuition 529 plan. These plans let you lock in tomorrow’s tuition at today’s rates, usually by purchasing one year’s worth of tuition, or some fraction thereof. Only 13 states offer prepaid plans. They are generally available only to in-state residents and can be used at public colleges in that state. A consortium or private colleges also offers one called the Independent 529 plan (www.independent529plan.org).
Investing in either type of 529 plan (instead of somewhere else) generally won’t your chance of getting financial aid. If the student does not use all the money for college, the balance can be rolled over to a 529 account for another family member. If the money is not used for college, the student will owe tax and a 10 percent penalty on the earnings.
