There are several different approaches to saving for college. We will analyze the benefits and drawbacks of the major ones.
A 529 plan is a tax-advantaged college savings vehicle that lets you save money for college in an individual investment account. In some, you enroll directly. Others require you to go through a financial professional.
Federal tax advantages. Earnings on contributions to your account are completely tax free if the money is used to pay the beneficiary's qualified education expenses. The earnings portion of any withdrawal not used for college expenses is taxed at the recipient's rate and subject to a 10 percent federal penalty.
State tax advantages. Many states offer income tax incentives for state residents (tax deductions for contributions or a tax exemptions for qualified withdrawals, with earnings also tax deferred or tax free). Some states limit their tax deduction to contributions made only to the in-state 529 plan.
High contribution limits. Most college savings plans have lifetime maximum contribution limits.
Unlimited participation. Anyone can open a 529 college savings plan account, regardless of income level.
Flexibility. Under federal rules, you can change the beneficiary of your account to a qualified family member at any time without penalty. You can roll over the money in your 529 plan account to a different 529 plan once per year without income tax or penalty implications.
Wide use of funds. Money in a ...