Many young parents say they want to save money for college costs, and the 529 plan is one of the best ways to save tax-free money for college. A 529 plan is a tax-advantaged savings plan that helps people save for college costs in the future. Legally, 529 plans are called "qualified tuition plans." They are run by states, state agencies, or educational institutions, and Section 529 of the Internal Revenue Code gives them the green light. In 2006, the tax code was changed to make it permanent that earnings from a 529 plan are tax-free when they are taken out to pay for college. This has made the 529 plan the best way for college savers to put money away because earnings no longer change their status.
There are two kinds of 529 plans: plans for paying for college ahead of time and plans for saving for college. At least one kind of 529 plan is run by each of the fifty states and the District of Columbia. A group of private colleges and universities also offer a plan to pay for college ahead of time. There are differences between plans to pay for college ahead of time and plans to save money for college, and each family needs to figure out which plan may be best for their needs. Most pre-paid tuition plans let college savers buy units or credits at colleges and universities that participate. These can be used for future tuition and, in some cases, room and board. Most plans to pay for college ahead of time are run by state governments and require you to live in that state. Many state governments back plans for paying for college ahead of time and guarantee investments in those plans.
College savings plans usually let a college saver, who is also called the "account holder," set up an account for a student, who is called the "beneficiary," so that the student's eligible college expenses can be paid. A person with an account usually has a few options for how to invest his or her contributions, which are then invested by the college savings plan on the person's behalf. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as age-based portfolios that automatically switch to safer investments as the beneficiary gets closer to college age. Most of the time, money taken out of college savings plans can be used at any college or university. Mutual fund investments in college savings plans are not backed by the state government and are not insured by the federal government.
