How Does a 529 Plan Work?

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How Does a 529 Plan Work?
How Does a 529 Plan Work? (Image: cims.hispanictips.com)

How it Works

529 plans are controlled by individual states who hire management companies to run them. The 529 plan can either be a prepaid tuition plan, in which you lock in future tuition at today's rates, or a savings plan. The savings plan is just like a 401(k) plan with a variety of funds and investment vehicles all tied to the stock market to choose from. Each state plan is different and some have more than one plan. In some states there are limits to how much you can contribute a year. Follow a link in Resources below to a state-by-state comparison of 529 plans. Bear in mind that you do not necessarily have to go with the 529 plan in the state in which you live.

Tax Implications

529 plans are tax deferred and in some instances could be tax exempt. This means that you do not have to pay taxes on any income earned or gains made by the 529 account. Also you can make withdrawals tax-free for eligible education expenses. This particular provision of the 529 plan is set to expire in 2009, so Congress may be have to renew it. For financial aid purposes, funds in a 529 account are not treated as the child's assets. Another advantage of the 529 plan.

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