What Is A 529 Education Plan?

The Federal government has introduced different types of investment plans for helping parents save money to secure a better future for their children

. The 529 Plan is one of them and helps parents make a tax free investment for their childrens education. Though the plan has been in existence for years, it has become a popular choice over the years, as people have began to learn the importance of saving money and future planning.

The plan, which has come into effect from 1996, has been named after Internal Revenue Codes Section 529. The plan is operated by particular educational institutions or by the state.

529 Plan- An Introduction

Someone who is new to the 529 Plan may like to know that it is a popular tax advantaged investment plan dedicated to helping students meet their college expenses easily. Also known as the qualified tuition plans, these plans are generally sponsored by the state or any state agencies.

In some states, educational institutions also act as the sponsor of the plan. 529 plans are further divided into two distinct categories to help people make their investments as per their needs. College savings plans and prepaid tuition plans are precisely the two distinct categorizations made on these plans.

529 plans are available in almost all states. Yet, one may not be able to find both the plans in every state. 529 plans are applicable nationwide. However, students who have relocated to different states for studies should inquire the details of the 529 plan applicable to a particular state before enrolling in any of the colleges.

How The Different Types of 529 Plans Work

Each state in US has at least one type of 529 plan for supporting educational requirements. In some states, one can also find both the plans applicable. Therefore, to make a better choice, you should have some understanding of both the plans.

College Savings Plan

The operating method of this plan is quite similar to the IRA or 401K plans. Sponsors of the plan offer multiple saving plans and one just need to select the option that suits his purpose in the best way. It is always recommended to estimate the amount of money that will be required for supporting the expenses.

Selecting a low rate investment plan may not be of any help in the future. The value of the account when you are ready to use the funds are determined by the performance of the account, so you will want to be sure that you invest wisely.

College Prepaid Plans

If your state offers this plan, you just need to plan your childs education wisely and purchase the credits that you think will be enough for supporting a college education. Depending on the money you invest or credits you purchase, you can pre-pay the complete or partial expenses for your childs education.

Both College Prepaid Plans and College Savings Plans offer tax free investments. Just note that the investment is only tax free if the money is used for qualifying education expenses. Any mony left over after paying such expenses is subject to be taxed.

by: Matt Fulton

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