Get to Know Section 529 Plans

Section 529 plans include both prepaid tuition programs and school savings plans. While prepaid tuition programs have been around longer, it is the school savings plan that is garnering most of the attention these days. Changes to college savings plans enacted several years ago by the Economic Growth and Tax Relief Reconciliation Act made these plans more attractive from a tax-planning standpoint.

Basically, a college savings plan allows you to place money in a state plan to be used for the beneficiary's higher-education expenses at any college or university, which include tuition, fees, books, supplies, and certain room-and-board costs. Your money is invested in stocks, bonds, or mutual fund options offered by the plan, with no guarantee as to how much will be available when the beneficiary enters college. Some of the more significant benefits of these plans include:

Most states now offer college savings plans, with the plans administered by the state or financial institutions. Some state programs only accept residents, but most plans accept participants from any state. Before contributing to a plan, consider these tips:

College savings plans offered by each state differ significantly in features and benefits. The optimal plan for each individual investor depends on his/her individual objectives and circumstances. In comparing plans, each investor should consider each plan's investment options, fees, and state tax implications.

Update: Beginning in 2018, the Tax Cuts and Jobs Act (TCJA) made it possible to use 529 accounts to pay for tuition not just as college, but also at public, private, or religious elementary or secondary schools. The TCJA also allows you to take tax-free distributions of up to $10,000 per year to pay for these education costs.

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