Saving for College: 529 Plans
Education Savings Plans
Your parents or other relatives can save money for you to pay for college in a special type of program called a 529 plan. These plans are set up to help families save for college. The money in them can only be used for education expenses.
The major benefit of these plans is that they are exempt from federal income tax as long as you use the withdrawals for eligible college expenses. The rules regarding state income tax on these accounts vary, depending on where you live.
Types of 529 Plans
There are two different types of 529 plans.
College savings plans are state-managed investment accounts. They are usually mutual funds, although there may be other investment options used. The money in them can be used for tuition, fees, room and board, books, and supplies. You can use the money to pay for expenses at any college.
Prepaid college tuition plans allow families to purchase your education now, at what it costs today, even though you won’t be enrolling for several years. These plans help you lock in the cost of college, and are guaranteed to cover your costs when you attend. You can only use the money to pay expenses at public colleges in the state where you are attending college.
If your grandparents set up an account, it falls under the tax laws for gifts, which saves even more money. And if you don’t need all the money, it can used to pay education expenses for other grandchildren.
Check with your family members to see if they can set up an account for you — maybe they already have!
