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529 Funds - What You Need to Know


529 funds are Federally sanctioned and state run investment programs that allow parents to invest for the future education of their child. Most 529 funds are managed by the states and many offer inducements and benefits for the investors who reside in that state. But, you are allowed to open an account in any state. Certain educational institutions are also allowed to operate 529 programs, but they are limited to the prepaid tuition plan.

529 funds are designed to help families save funds for future college costs. 529 funds are named after the section 529 of the Internal Revenue Code. Plan participants receive various tax benefits when you open a 529 program. There are two basic types of 529 funds - prepaid tuition funds and savings plans. Most states offer one or the other with the savings plans being the most popular, but a few offer both formats.

The operating rules of these plans are formulated by each state. The state makes the decision whether it will offer both the plans or just one 529 plan and along with their program manager decide exactly which investment portfolios will be made available. Most states offer a wide-ranging selection of investments to appease everyone from the most conservative to the most aggressive. As mentioned above, educational institutions may only offer a 529 prepaid tuition plan.

Benefits of 529 funds savings plan

* 529 plans offer some excellent tax breaks If you put money in a 529 college saving plan then your funds grow tax-deferred until the time you need to remove the money from the program. At that time you will also be glad to note that the disbursements are Federal and mostly state tax free as long as the funds are used for college expenses. Most states don't impose any taxes on earnings as well as principal amount, but you should check with your state to make sure.

* You maintain control of your money With 529 funds, you are in charge of your transactions. You can decide when to withdraw money and how much to withdraw. Unlike 529 funds, in the custodial account, your child gets control of the money when he reaches maturity. In a 529 account you are in control of the money and not your child.

* 529 funds are flexible You can easily open numerous accounts for any person regardless of his age. You can start these accounts for each of your kids and even yourself if you are planning to study. Grandparents can open accounts for their grand children. You can have 529 funds for each child in a different state. The only issue will be to make certain the total for each beneficairy across all their accounts doesn't go higher the the state imposed lifetime limits for 529 funds In most cases, this figure is anywhere from $200,000 up to $350,000 or more. Another big advantage of 529 funds are that if your child does not go for higher education or does not use full amount of money in the account then you can pass on the 529 funds over to someone else, perhaps a sibling, cousin or grandchild.

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