529 Savings Plans

The 529 Savings Plans are named after the IRS (Internal Revenue Service) tax code that provides special tax breaks for families. 529 Plans are education savings plans to help parents save for and invest in their child's future college education. These plans are managed by each state in the U.S.

There are two types of 529 Plans: College Savings Plans and Prepaid Tuition Plans

529 College Savings Plan

As a parent, you are able to save money for your child's future college education through the 529 College Savings Plan. You don't have to pay any federal taxes on the money from this plan. In some states, you also don't need to pay state taxes on this money or you can deduct a portion of your contribution from your state taxes. In order for your money to grow, it is invested in different ways: through stocks, bonds, and money market funds.

• There are no residency restrictions so it's open to anyone.
• There are no minimum income requirements you need to meet.
• Your savings are taken care of for you so it's easy to manage.
• You can use the funds from the plan at any college or university in any U.S. state.
• The money from the plan can be used for college expenses such as tuition, fees, room and board, books, and supplies.
• Even if you have a 529 College Savings Plan, your child will still be eligible for financial aid for college.

Some important things to think about before setting up a 529 College Savings Plan:

• There are penalty fees and tax problems if you don't use the funds for college.
• With any investment, especially with stocks, there are risks. You may not always make a profit.
• There are fees you need to pay the account manager who is taking care of your plan. Sometimes these fees are as much as 1 to 2 percent of what your account earns in a year.
• Federal tax benefits could change or stop altogether.

529 Prepaid Tuition Plan

This savings plans allows parents to buy their children's future college tuition at today's prices. You contribute money to the plan today to invest in your child's education in the future. When your child is ready to go to college, you receive the dollar value of what the tuition costs.

• The money that you earn from the plan is free from federal tax as long as the money is going to be used to pay college expenses. In most cases, you can also deduct this amount from your state taxes.
• This plan is a fairly safe investment for parents who know where their children will go to college in the future. There is only a small risk.
• The money you invest in this plan is usually a better investment than a regular savings plan or CD (Certificate of Deposit)

Some important things to think about before setting up a 529 Prepaid Tuition Plan:

• Funds from the plan will affect your child's future chances for financial aid. The funds are treated like a scholarship-this reduces your financial need dollar-for-dollar.
• The funds can only be used for public colleges and universities in the state your family lives in.
• For some plans, the funds can only be used for college tuition and fees. Parents will need to pay for room and board, books and other fees.
• If you want to cancel the plan or get a refund, there are high-cost penalty fees you will need to pay. Your penalty fees depends on the amount in your account and the state you live in. You could also lose the interest you have earned on the account.

For 529 Plan forms and more information, contact the:

IRS Tax Advocate
Phone: (877) 777-4778 (toll-free); TTY/TDD: (800) 829-4059 (toll-free)