529 Plan Basics

by Lynn Burbeck

Saving for college can be expensive. That is why it's imperative for parents of college-bound children to plan ahead. One way to start saving for college is with a 529 Plan. These educational investment plans vary from state to state but share many of the same key benefits. One of the biggest benefits is the fact that they are exempt from federal taxes.

Types of Plans

There are two basic types of 529 Plans. First is the college savings plan, which allows the plan's beneficiary to use the funds for college expenses at most accredited colleges and universities in the United States. Expenses include tuition, fees, books, school supplies and room and board. The second type of plan is the prepaid tuition Plan, also called a prepaid education arrangement. These plans are limited to in-state, public schools only and have the benefit of locking in in-state tuition rates at their current prices. There is much less flexibility in these plans, but the value of the investment is guaranteed.


Although the exact terms of your 529 Plan will vary depending on the state in which you reside, there are a few features that are common among all plans. All earnings and withdrawals are federally tax exempt as long as the money is used for college expenses. If the money is used for purposes other than college expenses, a penalty will be enforced. In addition to this federal tax waiver, some states also waive state taxes for residents. Another important feature of the 529 Plan is its high maximum contribution limits. Depending on the state in which you live, you may be able to contribute up to $375,000 per child in the fund as of publication.


One of the key benefits of contributing to a 529 plan is that it is the donor who retains control over the money -- not the beneficiary. This means that you'll have a lot of say regarding where, when and how the money is spent. Another important benefit is that the plans are very low maintenance. Once you decide on a plan and fill out the enrollment forms, all you need to do is contribute money on a regular basis and the plan takes care of itself. This can be automated by scheduling contributions directly from your checking or savings account.


It's important to realize that 529 plans are not without drawbacks. In most states, the contributions made to the 529 plan are considered parental assets for the purpose of determining financial aid eligibility. Also, you need to understand that your investment is susceptible to highs and lows in the stock market just like their other investment accounts. This means that you always run the risk of having your plan contribution perform badly in the market, and you could lose money. Prepaid tuition plans have less risk but do have significant refund and cancellation costs associated with them.

About the Author

Lynn Burbeck is a professional writer with over five years of experience writing for the Web. She has published numerous articles for print and online media including "Grit" Magazine. Burbeck holds a B.A. in journalism and political science.

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