Saving for College: What is a 529 Plan?

In 18 years, you can expect a four-year college degree to cost as much as $80,000 to $200,000. How can you ever save that much for your children's education? One way to start saving is with a 529 plan. The key is to start as early as possible and save as much as you can afford. So what is a 529 plan?

A 529 college savings plan is so named after section 529 of the Internal Revenue Code that allows states, state agencies or educational institutions to sponsor these tax free savings plans. There are two types of 529 savings plans, the college savings plan and the prepaid tuition plan. While both plans are different they have many advantages in common.

Both 529 plans offer federal tax savings. The money you invest in the plan grows tax free and can be withdrawn tax free when the money is used for qualifying educational expenses. There may also be tax benefits from your state as well. Check with your accountant or tax adviser for information about your state.

There are other advantages to the 529 plans besides the tax savings. Grandparents and even others that are not family can choose to contribute to your child's 529 savings plan. The contribution by others qualifies for the annual gift tax exclusion. You can transfer your savings in a 529 plan to another beneficiary tax free as long as the new beneficiary is a family member of the original.

You are convinced that a 529 plan would work for you but which type is best for you. That is a question that is best left to your financial adviser. It will also be dependent on just what types of plans are offered in your state. Since 529 plans are not regulated by the federal government many different plans exist in all 50 states.

The two types of plans are quite different so let me give you a rundown of the benefits of each plan.