529 Plans

Learn more about one of the most popular plans for college savings.
What You Need to Know

Whether your child is 7 months old or nearly 17, you've probably woken up in a cold sweat over the nightmare of college tuition bills. So far, no one has figured out a way to make those ever-rising expenses disappear, but the Internal Revenue Service has made saving a little bit easier, with the 529 College Savings Plan.

It's the hottest craze in college savings today. The 529 plan, named for the tax code that created it in 1986, is chock-full of tax breaks and other advantages. Money saved in 529 plans can be used for tuition, room, and board at any accredited educational facilitiy -- including undergraduate and graduate school, community colleges and even some trade schools. More families are signing on every day. According to consulting firm Cerulli Associates in Boston, 529 plans had assets of $9 billion at the end of 2001, and they're expected to reach $51 billion by 2006. If you're saving for college (or graduate school, for that matter) you may want to start a 529 of your own. Here's why:

529 plans encompass the best parts of other college savings vehicles. It's very much like a Roth IRA, in that you can invest after-tax dollars. The money grows tax-free and the withdrawals are tax-free. And the contribution limits of 529 plans are much higher than Roths, which have a $2,000-a-year limit. 529 plan contributions can be more than $200,000 per child, depending on the state plan you choose. Unlike other college savings plans, you don't have to stick to the original beneficiary (you can move the account from child to child, or even to other relatives, if needed, by simply changing the beneficiary). You only need one account to satisfy your entire family's needs.

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