Advantages of Saving for College With a 529 Savings Plan

Congress initially approved the 529 Savings Plans in 1996, providing an additional way to set aside money for college. These plans have some distinct advantages, making them a popular choice for investors. The plans, run by each state, offer four key benefits, which include the following:

Few restrictions. The 529 plan does not have income limits for the custodian or beneficiary, and no age restrictions by which you must use the funds and can have virtually anyone as a beneficiary. Plans do not have annual contribution limits which enable you to add up to $14,000 per year per person without incurring a gift tax. Lifetime contributions fall between $235,000 and $500,000.

Flexibility on when and where you can use funds. Post educational training includes more than traditional colleges and universities. Most vocational schools which qualify for federal aid is on the accepted list.

Wide choice of plans. Each state has 529 savings plans, and some offer more than one. You can purchase a plan from any state you choose, and plans have varying investment options and tax benefits. The beneficiary can attend an in-state or out of state school, and a public or private institution without affecting the taxation benefits. States compete for investor dollars, and some offer attractive benefits such as tax deductible contributions or withdrawals free from state taxation.

Tax-free growth and withdrawals. To gain the tax benefits you must use funds for educational purposes, giving you tax-free growth and withdrawals. There is no initial tax deduction. You can use the money to pay for tuition, room and board, fees, books, and some required technology such as computers, software, and printers.

529 Saving Plans rely on market growth to build account balances. The longer the funds remain in the account more beneficial the tax benefits become.