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529 College Savings Plans

How Savings Works

College education is so important that the government helps folks save for it. A 529 plan is an investment for a child's education that is put aside in a mutual fund and grows in the account free of federal income tax. The money is withdrawn from the plan when the beneficiary is ready for college and used to pay tuition and other school related costs.

There are two kinds of 529 plans:

  • Savings plan. This works like an IRA or 401(k) retirement account. You can invest in your choice of mutual fund without worry of being penalized for taxes when you cash it in to pay for school.
  • Prepaid plans. Offered by public universities, these allow you to make contributions toward tuition and fees at those schools over time. They can also be converted for use at schools in other states and private colleges. Some private schools also offer 529 plans.

The quality of these plans varies from state to state. Fortunately, you are free to invest in any state’s plan, no matter where you live. And if you move to a new state, you can continue investing in the same plan.

Financial Aid Availability
A 529 account does not affect the beneficiary's eligibility for financial aid. It remains an asset of the account holder and not the beneficiary. These accounts do have strict limitations on what they can be used for, including tuition, fees, books and equipment required for class. The money may be used for room and board only if the beneficiary attends school at least half the time and the amount is dictated by what the educational institution uses to compute the cost of attendance.

An investor can start a 529 account for any child, related or unrelated. The investor can change the beneficiary at any time. So if you start a 529 for one of your children who later decides not to attend college, you can designate that money to be used by any other college-bound child.

Be aware that when you contribute to a 529 plan, there may be gift tax consequences if the contribution exceeds $13,000 per person per year.

Coverdell Education Savings Accounts
You can contribute up to $2,000 a year to a Coverdell education savings account for your child, as long as your income is under $190,000. Each child can receive a contribution of only $2,000 a year. So if Grandma puts in $2,000 this year, you won't be able to contribute until next year. These accounts can be opened with any financial institution and invested in anything from savings accounts to mutual funds.

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