What Is a State 529 College Plan?
States and educational institutions operate 529 plans (also called Qualified Tuition Programs) as a way to help parents save for their children's college education. Every state operates at least one 529 college plan. Details of the plans vary by state.
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Types of 529 Plans
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The two types of 529 plans are prepaid tuition plans and college savings plans. With a prepaid tuition plan, you are buying future tuition and, sometimes, room and board at the colleges and universities covered by the plan. A college savings plan is an investment account that your child can later use to pay qualified education expenses to any eligible educational institution, which the Internal Revenue Service defines as "generally any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education."
Benefits
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Although contributions to a 529 plan are not tax deductible, the earnings on the investment are tax-free, as long as your child uses the money for qualified educational expenses. The distributions from the plan must not exceed adjusted qualified-education expenses as defined by the IRS. Some states also offer tax benefits.
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Considerations
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States that offer prepaid tuition plans that cover in-state tuition will let you transfer the value of the plan to private and out-of-state schools; however, depending on your state's rules, you may not get the full value of the plan.
Alternatives
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If you want to save for your child's college education, alternatives to a 529 plan include Coverdell education savings accounts, Uniform Gifts to Minors Act (UGMA) accounts, Uniform Transfers to Minors Act (UTMA) accounts, tax-exempt municipal securities and savings bonds. All these options offer some type of tax-advantage. You can also save money in any taxable savings or investment account. The best option depends on factors such as your financial situation and the options you want to give your child for higher education.
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