What They Are
Prepaid tuition and savings, or 529, plans are operated by the states to help families save for future college expenses. The individual states manage the investments and the plans have special tax benefits. All 50 states now offer at least one 529 plan.
The Two Basic Types of Plans
The two basic types of 529 plans are prepaid tuition and savings.
Prepaid tuition plans cover in-state tuition for public schools but contain provisions that allow you to apply the built-up value for private and out-of-state schools. There are inevitable variations in every state and every plan, but as a general rule you can normally apply the full amount of the value to these private and out-of-state schools.
Savings plans allow you to apply the full value of your plan to any accredited school in the U.S. as well as several overseas.
The 529 Plan Advantages
The 529 plans have 4 main advantages:
1. Tax Breaks
Your money grows tax free and there is no federal tax on the eventual distribution.
2. Control is Retained
You, the donor, remain in control of the plan investment. At any time, you can make a withdrawal — and pay the taxes due as well as a 10% penalty.
This one is quite simple. Everyone is eligible to participate and there are no age or income restrictions.
4. Estate Planning
Up to $55,000 can be contributed over a 5-year period and be exempt from gift taxes.
Talk with a trusted advisor such as a CPA or CFP (Certified Financial Planner) if you have questions about these plans. As we stated above, there are a lot of nuances between different plans and tax rules change all the time.