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A Great Way to Save for College
529 plans have become one of the more popular options for families saving for a child's college education, and for good reason. Though the plans differ from state to state, they are all exempt from federal income tax, and that can give a real bottom-line boost to your college fund.
What Is a 529 Plan?
A 529 plan is a state-operated investment plan that gives families a federal tax-free way to save money for college. Authorized by Congress in 1996, they are officially known as qualified tuition programs (QTPs), but commonly referred to as "529 plans," "state 529 plans," or "section 529 plans" after the section of the IRS code that provides the plans' special tax breaks.
Two Types of 529 Plans
529 plans come in two varieties -- college savings plans and prepaid tuition plans. Every state has at least one of these two options and many states offer both. College savings plans let parents use their plan funds for college expenses at any college. Prepaid tuition plans let parents lock-in future tuition at in-state public colleges at present prices. Get the facts about each plan, and decide which type might be right for you:
529 Plan Facts
Note: Each 529 plan has its own set of rules and restrictions, which are subject to change. Make sure to request the most recent plan details from plan administrators.
Now Is the Best Time to Start a 529 Plan
The Economic Growth and Tax Relief Act of 2001 makes 529 plans even more appealing, beginning in January 2002.
For more information consult IRS Publication 970.
Which Plan is Right for You?
A college savings plan may offer you more options than a prepaid tuition plan. The savings method gives you much greater flexibility in college choice, an important advantage considering that a savings plan can begin 10-15 years or more before the college selection process gets underway. (If you like the idea of prepaid tuition, you can do this through a college savings plan by using four years of in-state public tuition as your savings goal).
Another advantage of college savings is that, if your child qualifies for need-based aid, the federal formula will ask you to contribute less from college savings than from a prepaid tuition plan.
More Information on 529 Plans
The Web site of the College Savings Plans Network, an affiliate of the National Association of State Treasurers. Includes an information clearinghouse of current 529 plans.
Comprehensive site devoted to 529 plans, founded by accountant and 529 specialist Joseph Hurley. Includes articles, FAQS, and ratings of each state plan.