What is a 529 Plan?
Created in 1996 by Congress, the 529 College Savings Plans are technically called Qualified Tuition Programs. Since the Internal Revenue Service Code's Section 529 includes the definition and requirements of these programs, most people now just refer to them as 529 plans or 529 college savings programs. Each state (or qualified educational institution) creates and runs their own 529 programs which provide a tax-advantaged vehicle to save for a college education.
When you open a 529 account you must assign a beneficiary. While this is usually your child or grandchild, it can be anyone, including a friend or even yourself. The Federal code doesn't allow for any Federal tax deduction, but the 529 account earnings will grow federal and state tax deferred. Even better, when you use the disbursements for qualified educational expenses, they will not be subject to Federal or state income taxes. So, if you have a young child with many years to go until college, a 529 account can be especially useful since the earnings will have plenty of time to compound.
While there is no Federal tax deduction allowed for 529 contributions, many states offer a yearly state tax deduction to taxpayers, so check to see if your home state provides additional tax benefits. You are allowed to open a 529 account in most states, but these tax deductions can more than offset other advantages offered by outside plans like lower administrative fees.
There are two basic types of 529 plans available.
529 College Savings Plans, on the other hand, are offered by almost every state. Most offer multiple investment options with up to twenty different portfolios to satisfy the needs of almost everyone. Age-based portfolios, which automatically move the investments from aggressive while the beneficiary is young to more conservative as he/she approaches college age are quite popular since they require little if any upkeep. Just put your money in and the fund takes care of the transfers. As the account owner you can just sit back and watch unless you decide to move to another type of portfolio.
Besides the age-based portfolios, most states offer a variety of options in which the account owner may manually invest and move funds. These range from the very conservative to the very aggressive and monies invested will not move as the beneficiary grows older. Since the state 529 plans are administered by various managers, the choices will vary from state to state. Read the disclosures carefully to see which funds match up with your investment goals.
Keep in mind that money invested into a 529 account is usually not guaranteed and balances can move up or down depending on the movements of the stock and bond markets. Make sure to check with your financial advisor to see if a 529 college savings plan is best for you.