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529 Plans
A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996. 529 Plans can be used to meet costs of qualified, higher institution colleges nationwide. In most plans, your choice of school is not affected by the state from which your 529 savings plan was established. For example, you can be a Utah resident, invest in a Virginia plan and send your student to college in California. The advantage of participating in your state's plan is that contributions may have some state tax benefit.
Proceeds within a 529 plan may be invested in assets such as mutual funds, which provide long term growth potential, although investments in any stock market related investment are subject to risk. As long as the proceeds within the 529 plan are used for qualified education expenses by a student enrolled at least part time at a qualified institution, the growth on any distributions are free from federal tax.
The advantages of a 529 plan include the flexibility of investment choices within the 529 plan, the tax deferred and tax free growth potential if money is used for qualified expenses and the owner of the account (typically a parent) is in control of how, when and who gets to use the money. One drawback to a 529 plan is that any growth proceeds not used for qualified educational expenses at a qualified institution may be subject to federal income tax plus a 10% penalty. Please see this College Savings Comparison Chart to view the differences between a 529 plan and other children's savings options. Please also consult your tax professional for tax advice related to college savings plans.
