The 529 plans are named after section 529 of the Internal Revenue Code 26 U.S.C. § 529, which clues you into the reason you might chose to help fund college with one of these savings plans. There are big tax advantages, particularly for parents (students can also save in 529s) and for those investing in the 529 plans of the state where they live.
See Connecticut’s tax breaks for 529’s. That’s on top of the benefits of compound interest, growing the contributions made by parents/students.
The Two Types of 529’s:
- Savings plans
- Prepaid Tuition
Savings plans are, as outlined above.
Prepaid tuition, in theory, lets you lock in the price of college credits by buying them years before you attend college. However, prepaid tuition plans often don’t live up their promise.
Worrying in Vain? Common Fears That Rarely Materialize:
- Having a 529 will diminish my chance of financial aid.That’s rarely the case.
- Tax on withdrawals from 529 plans.
Most people haven’t enough saved in the 529 to hit the tax-trigger threshold.
- Working while I’m in college will undercut my financial aid.
You have to earn quite a bit before it reduces your aid.
For clarification: refer to the IRS and the formulas in the Federal government asset allocation table, part of the Federal Methodology used to calculate financial aid.)
College savings are generally not even factored into financial aid for most families earning up to $50k. —Peterson’s “How to Get Money For College,” 2012 edition.
(Note: that’s just about the typical (median) U.S. income.)
Other ways to save for college besides 529’s? (Without the tax advantages.)
- See video of SmartyPig, inspired by 529’s
- Upromise, a spend-to-save site
- Suggestions from accountants, the American Institute of CPAs.