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What is the 529 Plan?

Elvis Elvis

The 529 Plan can be a good source for saving money for college.

The IRS first introduced Section 529 of the tax code or the “Qualified State Tuition Program”, in 1996, as a resource for parents struggling to save enough for college or any post-secondary education. This legislation resulted in the creation of prepaid state-sponsored college plans.

These new accounts, dubbed “529 plans,” allow investors greater control over funds invested and do not limit where a student can go to school as long as the funds are used for higher education purposes.

The 529 plan is unique because it provides parents with the ability, like a Roth IRA, to put away after tax dollars that grow tax-deferred and come out tax-free, without having the income limits that prevent many people from taking advantage of a Roth IRA.
What is the 529 Plan?

Almost all states now sponsor a plan and all 50 states have passed legislation allowing for the creation of a 529 plan.

Because 529 plans are relatively new there have been changes made to them by both federal and state legislators as well as plan sponsors, i.e. insurance and mutual fund companies.

For those parents concerned with estate planning problems, the 529 plan, with its tax-free benefit and high contribution limit, makes it an ideal tool for this purpose. 529 plans are increasingly being promoted as an estate-planning device for wealthy grandparents.

As with all investments there are some downsides to the 529 plans. This is why I constantly advise parents to study what they are considering. Try to talk to as many people as you can, ask a lot of questions. Do not be in a hurry to invest because you are probably going to be in this education-funding plan for a long time and you do not have to jump at what you think is a great deal.

The legislation that makes the 529 tax-free will expire 2011 under the Sunset Provisions. Unless new legislation is passed or an extension is made any distribution taken form the 529 to pay for college or any post-secondary program will be taxed directly to the student.