To start, 529 plans are named for Section 529 of the Internal Revenue Code. Designed to help families set aside funds for college expenses, there are two kinds: prepaid or savings plans. Mutual funds are the catalysts of investment and contributions work in the same way as a 401K or an IRA. The different investment options will cause your account to fluctuate in value depending on the performance of the particular option selected.
The options available with a prepaid plan permit you to pay either all or most of the costs of an in-state public college education. Preparing for the future with one of these plans means buying tuition credits at today's rates. Performance is dependent totally on tuition inflation. Tuition credits can also be applied to use at private and out-of-state universities. You can live in New York, invest in a plan in California and send your child to school in Florida. Every state has at least one of these plans, although their conditions and restrictions may differ from state to state. You need to research all the conditions and advantages of any plan you are thinking about buying prior to investing.
The full value of your 529 account, however much it is, can be applied to any accredited college or university in the country. You do not have to reside in a specific state to be eligible for a 529 plan. The main focus of the growth of any 529 plan is dependent on the market performance of the investments. The majority of these plans provide many options, which allow for the investment of funds to become more conservative as the recipient gets closer to college age.
Savings and prepaid 529 college plans administer funds in a different way. Savings plans are managed exclusively by the states while prepaid plans can be administered either by the states or individual colleges and universities. A mutual fund or financial institution often handles the records and performs administrative duties.
As long as a 529 satisfies a few general qualifications, federal tax law benefits apply. Income tax breaks are extremely generous with a 529 plan even though you cannot deduct them on your federal tax return. Investments eventually end up being federally tax-free as distributions grow and distributions to pay for college become tax-deferred.
There is no easier way to save for college costs than a 529 plan. These plans allow for universal eligibility and are not restricted by income or age.