529 Plans and Saving for College

What is a 529 plan? Good question, right? This time of year is the perfect time to ask that question. It is back to school time and many student and parent wished that they had started a 529 plan a long time ago. The good news is you can start a 529 plan at any time, but the earlier you start the better.

Ok, back to the first question. A 529 plan is an education savings plan operated by a state or educational institution that helps family set aside money for future college costs. It is named after the section in the Internal Revenue Code that created the saving plan in 1996. A 529 plan can meet the costs for many colleges nationwide. A 529 plan is not affected by the state you saving plan is from. You can be a resident of VT, invest in a KS CA plan and send you student to a NC college.

Nearly every state has a 529 plan available, many offers more than one type and it is up to you to determine which is best for your family. Each state decides whether to offer a 529 plan and also how it looks. It is best to research the features and benefits for each plan before you invest. There are some benefits regardless of where you live. Some are:

  • The distributions that pay for the beneficiary’s college comes out tax-free
  • Many states offer tax breaks in addition to the federal treatment
  • Donor retains control of the funds
  • Low maintenance
  • Simplified tax reporting
  • Flexible
  • Substantial deposits are allowed

The 529 saving plans re categorized as either a prepaid or a savings plan. The savings plan is much like a 401K or IRA. You invest contributions into mutual funds or similar investments and your account will go up or down based on the value of the performance of the option you selected. The prepaid option lets you pay for part or all of the cost of instate public college costs. They may be converted for use at private or out-of-state colleges, but there is a separate investment plan for private colleges.