First up, what’s a 529 college savings plan? It got its name from Section 529 of the International Revenue Code, which states that the federal tax law grants you certain tax benefits if you can satisfy a few basic requirements.
The plan itself is a form of education savings plan which is operated by a state. A 529 college savings plan may also be operated by an educational institution specially designated by the state to provide such a plan. The purpose is to provide families a way to save money for future college expenses.
What are the benefits?
The first clear advantage of a 529 college savings plan over other education plans is the unrivaled breaks in income taxes you get. Remember that a 529 is provided for and operated by the state and federal law expressly provides that a 529 college savings plan is tax-deferred. Not only that, but college costs for the plan’s beneficiary come out free from federal taxes. Now, with the passage of the Pension Protection Act of 2006, the tax-free treatment of costs paid from distributions of a 529 college plan is made permanent.
The second advantage of 529 college savings plan over other education plans is that as the donor, you stay in charge of the account. In other words, the named beneficiary cannot claim the funds for himself. Only you have that right, with few exceptions. You are the one to decide when to withdraw funds and how much. In fact, most 529 college savings plans allow you to get back the funds from the account for yourself.
The third advantage of a 529 college savings plan is that it can provide you with an easy way to save for college. Applying for a 529 college savings plan is very easy and very simple. All you have to do is fill up a form and then make your payments. There is even one option where you can automate your deposits. It is the plan that handles the continuing investment of the account, not you. So, after doing all that is necessary to enroll under a 529 college savings plan, you can just relax and stop thinking about it. Of course, if you want to transfer your investment on your own, you can do that, too. You can change your 529 program or rollover to another program of the state.
And finally, the eligibility requirements for a 529 college savings plan are such that everyone can qualify. There is no income limitations required in general, and there are no age restrictions. What’s more, the amounts that you can pay to your account are substantial. Some states may even allow over $300,000 per beneficiary.