Going to college in the United States can be an expensive venture, but at least the Congress has given a variety of ways to save and pay for higher education through tax advantages. One of these programs is the qualified tuition plan, also known as the “529 plan.”
A 529 Plan is a tax-advantaged investment savings account to save for higher education expenses. It is run either by the state or by any college/ university. An “owner” creates an account, deposits cash in it, and designates a beneficiary. The plan invests the money in the account and its earnings and growth are not subject to federal income tax until the beneficiary reaches college age.
Once the beneficiary reaches college age, the funds are generally used to pay for their higher education at any college or university, regardless of the state that sponsors the plan. While the amounts withdrawn for educational expenses of the beneficiary are not subject to income tax, any other use of the amount are subject to tax.
To set up a 529 Plan, a donor (whether it is a parent, grandparent, or any other person) may establish an account by contributing cash to the plan and designating a beneficiary of the account. Most states even allow non-residents to create 529 Plan accounts. While there is no limit to the amount of annual contributions to the 529 Plan account, each state sets a total contribution limit based on the average cost of that state’s attending college.
For more in-depth information about the 529 Plan, consult with a tax or financial adviser.