Making the Most of a 529 College Plan

A 529 college plan is one of the best ways for parents to save money for their children's education. 529 college saving plans are education savings plans offered through state or educational institutions, and they are intended to help families start preparing for the cost of future education.

Your state likely sponsors a 529 college saving plan and will set the maximum amount you may contribute to the plan. If you already have a 529 college plan or are contemplating opening one, you should consider some information that can help you make the most of your 529 college saving plan.

Tax Benefits: Contributions to your 529 college plan grow tax-deferred, and any distributions that cover a beneficiary's education costs are federally tax-free. Also, while your contributions are not deductible for federal tax returns, a number of states offer tax benefits on 529 plan contributions.

Keep in mind that you can take distributions from a 529 plan for reasons other than college, but you will lose the tax breaks, and you will have to pay a 10% penalty.

Donor Control: If you donate the money to the 529 college plan, you maintain control over the plan's proceeds, not the named beneficiary, which can include a child or an adult saving for her own education. In fact, with very few exceptions, the plan's beneficiary does not have a right to the funds. You, rather than the beneficiary, make all the calls, deciding when and why to make withdrawals. Many plans may even let you reclaim the plan's funds at any time, giving you tremendous control over your investment.

Simplicity: 529 college saving plans are also fairly easy to maintain. Picking the plan is often the most difficult part of the process, as many people think they have to go to a college in the state where the plan is administered. However, if you invest in a 529 plan in Arizona, a state that offers a plan, the beneficiary can still attend any eligible college, including private schools and schools in other states.

Once you chose a plan, complete the enrollment form and designate your contributions, the plan and your ongoing investment are managed by the plan itself through your state treasurer's office or an investment company hired by the program manager.

Taken together, there are a number of benefits that let you maximize your 529 college saving plan. Given the inherent flexibility, control and tax savings offered by 529 college plans, using such a plan may make sense in planning for your child's education.

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