A 529 plan is a college savings investment plan that offers significant tax breaks for its beneficiaries. The 529 plan is so named after Section 529 of the Internal Revenue Service (IRS) US federal tax code. The savings plan has many advantages and has become a popular way to save money for a child’s education.
The 529 plan may be affected by state tax code, and in each state differences will occur. However, from the standpoint of paying federal taxes, the tax benefits of the 529 plan are tremendous. Although this section of code was added in 2001, it has now been made into permanent law via the 2006 Pension Protection Act.
The 529 plan has two basic types. A person can elect to deposit a lump sum, up to 60,000 US dollars (USD) per every five years, or up to 120,000 USD if a married couple sets up the plan. Alternately, people can make small monthly contributions to a 529 plan.
The lump sump investment in a 529 plan is offered by colleges, and sometimes states. The amount invested is usually guaranteed. Money market funds investors usually administrate the money in order to grow the investment. If a large lump sum is invested, the goal is to bring that fund up to the cost it will take for a child to attend college down the line, as fees will likely rise during the child’s lifetime.
A 529 plan where small contributions are made tends to be offered in each state, and may be administrated by several different sources. Some programs offer matching funds to help increase investments made by those who cannot afford to invest very much.
The big difference between the 529 plan and prior college savings plans is that children do not get taxed when they withdraw the money to attend college. Further, all funds can be used to pay tuition, books, living expenses, and any necessary equipment. Theoretically, a college student could purchase a computer with a 529 plan, or use funds for travel to another country as part of an exchange student program.
Another advantage of the 529 plan is that the money is protected if the family undergoes bankruptcy. Essentially, the money is unassailable until the child attends college. Also the 529 plan usually provides for tax protection on any money made as a result of the investment, as long as it is reinvested in the plan. Thus no taxes are paid on money made from mutual funds or savings in which the plan might be invested.
Private businesses and most states offer variants of the 529 plan. It is important to evaluate the specifics of each plan prior to deciding where to place one’s money. Some plans have distinct advantages over others. Before making a decision, be certain to read all information regarding several different plans in order to make a reasoned decision about where to place one’s investment.