What Is A 529 Plan?

By: FamilyResource.com

With the average cost of a four-year college skyrocketing more and more every year, many parents do not know where to turn to invest money for their children. Luckily, the 529 Plan exists to help you turn your hard earned dollar into a first class education for your son or daughter.

A 529 College Savings Plan, officially known as "qualified tuition plans", is a state-run program designed to help you and your children pay for college by eliminating certain taxes. Because most investment programs are subject to taxes — both federal and state — earnings can be much higher if those taxes are removed. This is what the 529 plans do, making investments much more lucrative.

529 plans are started by states, state agencies, or educational institutions, and are authorized in the Internal Revenue Code by section 529. Most programs offer no federal tax on earnings, and many offer no state tax.

All fifty states and the District of Colombia sponsor 529 plans, but each plan is individual, with differences in both the companies and corporations invested in, and the amount of the fund that is based on stocks versus the amount based on bonds.

There are two general forms of 529 plan. The first is the Prepaid Tuition plan, which locks in tuition at specified Universities at today's prices. The second is the more common College Savings Plan, which allows you to invest money with the intention of using the money to pay the beneficiaries accrues college fees with the investment. Both are not subject to federal tax, and most are not subject to state tax.

It is important to only use these programs for college savings. In many cases, if the funds are pulled out before a certain time period, or for a reason other than paying for a college tuition, then all of your earnings can be forfeit, or subject to further tax than you would have had to face under a non-state sponsored investment plan, such as a mutual fund.

Many brokerage houses offer a 529 plan, but it is important to make sure that their fees — including both management fees and sales commissions — do not outweigh the benefits of buying the college savings plan directly from the state that you live in. In many cases a brokerage house is a good way to invest if you find that the 529 plan in your state (such as Maine, which has a relatively low rate of return) is not producing the same returns as another (such as Arizona, which routinely posts high earnings).

A 529 plan can be a great way to save a ton of money without paying any exorbitant fees.

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