The 529 college savings plan, created by Congress in 1996, is strictly used to save for college education or post-secondary training.
There are two types of 529s. One is a prepaid tuition plan, which locks in the current tuition costs for a state’s eligible colleges with no investment options. The other is a college savings plan, in which parents contribute to a 529 similarly to a 401K retirement plan, with investments like mutual funds determining the return.
Generally, there are no limitations to contributions or income requirements for a 529 plan. The plans are operated by each state’s educational department and come with tax advantages. However, parents can invest in a 529 plan from another state and send their child to a school out of state using the money.
Parents can designate a child or themselves a beneficiary, if paying for their own education, and can change the beneficiary at any time. Funds withdrawn but not used for qualifying educational expenses are subject to a 10-percent penalty.
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