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About 529 Plans
A 529 plan is a college savings program designed
to help families be financially prepared for college expenses. The
term "529 plan" refers to IRS Section 529, which is the federal tax
code that established these plans. Typically sponsored by
individual states, 529 plans are popular for saving for college
because they offer tax-free earnings (when used for college
expenses) plus high contribution limits, investment flexibility,
and, in some cases, state income tax deductions for contributions.
(In Ohio's plan, the deduction for contributions is $2,000 per Ohio
taxpayer, per account.)
No matter what your age or income, you can
contribute money for any beneficiary. Most accounts are opened for
a child or grandchild. Your savings can be used to pay for
qualified higher education expenses at any college or
university—even graduate school—in the United States and abroad
that qualifies under federal guidelines.
Qualified higher education expenses include
tuition, fees, room and board and the costs of books, supplies and
equipment required for the enrollment or attendance of a
Beneficiary at an eligible educational institution. Eligible
educational institutions are defined under Section 529 generally as
accredited post-secondary educational institutions offering credit
toward a bachelor's degree, an associate's degree, a graduate level
or professional degree, or another recognized post-secondary
credential.
There are two types of 529 plans: prepaid
tuition and savings. Prepaid tuition plans (sometimes called
guaranteed savings plans) are offered in about 18 states and allow
for the pre-purchase of tuition based on today's rates and then
paid out at the future cost when the beneficiary is in college.
Prepaid plans may be administered by states or higher education
institutions.
Savings plans are different in that your account
earnings are based upon the market performance of the underlying
investments, which typically consist of mutual funds. Savings plans
may only be administered by states. Most 529 savings plans offer a
variety of investment options. Most offer age-based investment
options where the underlying investments are based on the age of
your child and become more conservative as the beneficiary gets
closer to college-age. In addition, most plans allow you to custom
build your own college savings portfolio by offering a variety of
individual equity or fixed income funds.
Many states now offer banking, stable value or
guaranteed options. These investments are designed to protect an
investor’s principal while providing for some investment
growth.