What you need to know
529 plans are a great way to save for college without having to pay taxes. There are two basic types: prepaid tuition plans and savings plans.
Prepaid tuition 529s allow you to buy a state college or university education for the future at today’s prices. Parents pay for the education in fixed installments. It can be a good deal, but watch out: prepaid tuition plans can adversely impact financial aid eligibility.
529 savings plans are more flexible than prepaid plans, but less of a sure thing. You can contribute as much and as often as you’d like, but there’s no guarantee your savings will end up meeting the level a student will need for an education down the road. Still, the tax-free growth and modest impact on financial aid eligibility do make 529 savings plans attractive for many.
Contributions to both types of 529s are tax-deductible. Remember that any withdrawals made for reasons the IRS doesn’t deem qualified are subject to federal and state taxes, plus a 10 percent penalty.
- You can open both kinds of 529 accounts directly through a state’s college savings program Web site.
- You can also open a 529 through a financial adviser.