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Section 529 Plans Can Provide Tax Benefits for Children and Adults

A 529 plan is a tax advantages investment and savings program designed to encourage saving for the higher education expenses of a designated beneficiary. Section  529 of the Internal Revenue Code provides this benefit.Each state has its own plan. There are also private plans.

520 Plan contributions are NOT TAX DEDUCTIBLE. Nevertheless, the plan grows tax free, and if withdrawn properly, it is not taxable.

Types of Plans  

There are two types of plans: Prepaid and Savings plans.

Prepaid plans allow you to lock-in tuition at today's rate. If tuition radically increases, you have paid the current lower rate. If tuition rates remain stable (doubtful!) then you have lost the investment interest and flexibility. Prepaid Plans may be administered by the States or private businesses.

Savings Plans allow tax free growth of your invested money without any guaranteed return. Usually, savings plans are invested in mutual funds and are subject to the vagaries of the stock market. Savings Plan may only be administered by the States.

529 Plan Money

Money from a 529 plan can be used for

  • Tuition
  • Fees
  • Books
  • Supplies and Equipment
  • Room and Board

If the money is not used for Education, then the withdrawals are subject to a 10% tax penalty.