There's no shortage of ways to save for your child's education. Once you know that you're ready to start, you must decide how.
529 plans can offer tax and other benefits unlike other types of college savings vehicles. Contributions made to a Section 529 Plan grow tax-deferred. Qualified distributions, taken for qualified higher-education expenses, are free from federal income taxes.* Depending upon your state of residence and the plan you own, qualified distributions may also be state income-tax free.**
529 plans offer professional management and provide a way for you to retain control of the account's assets on behalf of the account's beneficiary. Subject to some individual plan restrictions, generally 529 plans have no age, income or residency restrictions for participation.
Distinct differences exist between the two types of Section 529 Plans.
- Prepaid—A prepayment plan allows a donor to purchase a prepayment contract and select a beneficiary who will receive one or more years of future college tuition and other specified costs at a current rate. Most plans do not unilaterally guarantee that prepaid plans will cover the complete cost of future tuition at today's rates; however, these plans are a way to hedge against the rising cost of tuition.
- Savings—In a savings plan, a donor contributes to an account and then selects an investment option within this account that is anticipated to grow in value over time. Generally, a professional money manager contracted by the state will manage the collective assets of the plan.
Section 529 Plan account holders have the ability to roll the assets of their account to a different Section 529 Plan or adjust the investment options within their current 529 plan once every 12 months.
You retain control of the account's assets even when the beneficiary reaches the age of majority. This offers you the ability to change the account's beneficiary, and allows you to determine when distributions are taken from the account.
Additional features of 529 plans include estate planning and special gifting options. Contribution limits vary by state and plan, and may be greater than other types of college savings options.
*The provision allowing for federal income tax-free withdrawals was passed as part of the Economic Growth and Tax Reconciliation Act of 2001.
**See plan offering statement for a complete definition. This information is not intended as legal or tax advice. Your attorney or accountant should always be consulted about such matters.