What is a 529 plan?

A 529 plan is a state-operated investment plan that gives families a federal, tax-free way to save money for college. Authorized by Congress in 1996, 529 plans are officially known as qualified tuition programs (QTPs). 529 plans have become one of the more popular options for families saving for a child's college education. 529 savings plans are a good way to save for college and they offer great tax breaks. Though 529 plans differ from state to state, they are all exempt from federal income tax, and that can give a real bottom-line boost to your college fund.

529 Plan Options

529 plans come in two varieties: (1) college saving plans, and (2) prepaid tuition plans. Many states offer both options but every state has at least one of these two options. College savings plans let parents use their plan funds for college expenses at any college. Prepaid tuition plans let parent’s lock-in future tuition at in-state public colleges at present prices.

529 Plan Facts

• Earnings from a 529 plan are exempt from federal taxes, as are any withdrawals, as long as they go toward paying college costs.
  
• Some states waive state taxes for residents, other states allow deductions on contributions.
  
• 529 plans have generous maximum contribution limits -- some as high as $250,000 per beneficiary.
  
• Most states hire experienced investment companies, such as TIAA-CREF to manage their 529 accounts.
  
• If funds are withdrawn for purposes other than education, the earnings are subject to a 10 percent penalty as well as federal income tax. States may assess their own penalties.
  
• Great for grandparents: 529 contributions are considered completed gifts and are excluded from your estate. Grandparents can also switch beneficiaries to other grandchildren.

Note: Each 529 plan has its own set of rules and restrictions, which are subject to change. Make sure to request the most recent plan details from plan administrators.

Hilary Basile is a writer for MyGuidesUSA.com. At MyGuidesUSA.com (http://www.myguidesusa.com), you will find valuable tips and resources for handling life’s major events. Whether you’re planning a wedding, buying your first home, anxiously awaiting the birth of a child, contending with a divorce, searching for a new job, or planning for your retirement, you’ll find answers to your questions at MyGuidesUSA.com. Find scholarships, grants and financial aid tips and resources for prospective and current college students at http://www.myguidesusa.com/colleges