Section 529 Plans

Investors who wish to set aside money for their child's education have many different choices. A few of the more prominent options are some of those that have the most beneficial tax advantages. Section 529 plans are a certain class of investments set up for families to save for educational expenses while offering distinct tax advantages to those who participate. These plans are relatively new, and are suitable for many investors who are trying to get a head start on college savings while looking to improve their tax basis as well.

529 Savings Account Basics

Legislative changes altering the tax code in the year 2001 resulted in the creation of a brand new type of investments available for higher education savings. This type is commonly known as a 529 plan or a section 529 plan after the section of the tax code in which it appears. The creation of this new educational savings option gave families trying to put aside tuition money another option when it came time to choose an investment vehicle to capitalize on in their investment activity.

Section 529 plans are similar to Coverdell ESAs in that they allow families to set aside money for future college expenses while giving them certain tax breaks for doing so. Another similarity to ESAs also exists in that the money in these accounts is considered the named beneficiary's, a fact that can create entanglements in terms of financial aid eligibility. For this reason it is obviously critical that the funds in these accounts be made fully available for the intended recipient, and that they go toward educational expenses.

529 Plans Different from Coverdells

These section 529 plans are substantially different from Coverdell accounts in other ways, of course. Some of these differences serve to steer investors toward one option or the other. Investors who choose 529 plans are much more limited in the options they have to pick from than they are in ESAs, but this lack of choice is offset by the virtually unlimited levels of contributions they can make to the accounts. In addition, there is no timeline set up on when the beneficiary has to use up their benefits or pass them on to someone else. This is a great benefit for on again, off again or part time students, as well as those who end up attending graduate school. They can still use whatever funds might be left over even after they have passed the age of 30.

The lack of investment choice is a frequent and loud complaint among many investors who look at 529 plans as a possible option for their higher education savings. All told, there are two basic choices you have as an investor when you set out to create a section 529 account. You can opt to go with a prepaid tuition option, or choose a more general savings vehicle. The prepaid tuition option is seen as limiting by some because in most states, it encourages students to choose public universities (benefits are often prorated to the average cost of tuition in state schools if the beneficiary chooses to attend private school). But if parents can assure that they will be able to fully fund their child's tuition in advance, they often see this restriction as minor; after all, many students opt for public universities anyway.

529 Plans Grow Tax Free

Contributions to section 529 plans grow without taxes. They are not taxed upon withdrawal as long as they are used for educational expenses. They are great for students whose family finances preclude them from eligibility for aid.

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