Parents looking for a way to save for their children's educational future can take advantage of a 529 plan, which is a college savings account that is exempt from federal taxes.
Pay taxes on the money going into the savings plan, but as long as the money coming out is spent for education, the growth is tax free.
The 529 college savings plans were introduced in 1996.
According to the Internal Revenue Service, anyone can set one up in the name of a beneficiary. There are no limits to the number of plans a person sets up, and there are no income limits for people using the plans.
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Money in the plans can also be rolled from one family member to another. So, if you set up a fund for your oldest child, and the money is not completely used on that child's education, it can be rolled without penalty into a fund for the next child.
The money coming out of these plans must be used for higher education. That can include colleges and universities, vocational schools, technical schools or any other institution that can accept federal financial aid.
Money can be used for many different expenses associated with college including room and board, books and technology such as computers and internet access.
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The U.S. Securities and Exchange Commission reports there are two different types of 529 plans: pre-paid tuition plans and state-sponsored savings plans.
The pre-paid tuition plans are still investments, but they allow users to lock-in tuition costs. They do not generally cover room and board, just tuition and fees. Most have state-residency requirements.
The college savings plans do not lock in college costs, but they are generally more flexible. There are no age-limits for the beneficiaries. So, adults can use them. They offer a wider variety of items the money can be used to purchase, and can be used in any state.
You don't have to buy a plan from your state of residence. The plans are competitive and all states offer them. Some states offer matching funds for 529 plans.
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