College 529 Plans - Saving for College

529 plans got their identity from the Internal Revenue Code, Section 529. The two different types of 529 plans are savings and prepaid and both are designed to help families save money for college. Acting much like a 401K or an IRA, contributions are invested into mutual funds or similar annuities. Based on the performance of your investment, your account will go up and down in value.

The options available with a prepaid plan permit you to pay either all or most of the expenses of an in-state public college education. One buys tuition credits at today’s rate, to be utilized in the future. Tuition will fluctuate with inflation and that will affect the ultimate performance. Tuition credits can also be used at private and out-of-state colleges. There are plans in many states that allow you to reside in one place, invest in another state and send your child to college in still another state. Limitations and restrictions differ, but every state in the union has at a minimum of one 529 college plan. Before you invest in any 529 plan, research all the features, advantages and limitations it may offer.

A 529 college plan is a guarantee that the account, whatever it is worth, can be used at any college or university in the nation. 529 plans are not reliant on residing in the state where the plan was devised. The main focus of the growth of any 529 plan is dependent on the market performance of the investments. As the student becomes closer to college age, one of the options available with these plans allows investment funds to become more conservative.

The way the funds are administered comprises another major difference between the prepaid and savings 529 plans. Savings plans are managed exclusively by the states while prepaid plans can be administered either by the states or individual colleges. A mutual fund or financial services company often maintains the records and performs administrative tasks.

Federal tax laws dictate the fulfillment of a few basic qualifications for a 529 plan in order for tax benefits to be applicable. 529 plans offer unsurpassed income tax breaks even though your federal tax return will not allow a deduction for them. Investments eventually become federally tax-free as distributions grow and distributions to pay for college become tax-deferred.

A 529 plan can offer a very easy way to save cash for college. Universal eligibility together with no income or age limitations are important facets of 529 college plans.

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