A qualified tuition plan, commonly called a 529 after the section of the Internal Revenue Service code which authorizes it, is a simple and flexible way to put money aside for future tuition. All you really need to start a 529 savings plan is a beneficiary, someone who in the future may use the money for some higher education expenses. All 50 states offer 529 plans, and you can invest in any of them.
Pick a Plan
Find a 529 plan that fits your budget and your investment goals. Check with your state department of education, any college or university or refer to www.savingforcollege.com, which has a complete list by state of 529 plans. You can use your state's plan or invest in another state's plan if its investment options and state rules are more attractive.
You can open a 529 account in some states with as little as $25. You need your identification and social security number and that of the student you name as beneficiary. You can set up an automatic contribution program, perhaps with a payroll deduction, or put money into the plan at any time, in any amount. There are no minimum contribution requirements or IRS maximum limits on contributions.
Some states do have limits on contributions so if you plan to put a lot of money into a 529 you need to shop for a high-limit state. Also, very large contributions may fall under federal gift tax rules, which limit gifts to $13,000 a year to any one person, or $26,000 for a couple. You can put in five years' worth of gifts at one time, but you have to file a gift tax return for each year to claim the $13,000 annual exclusion.
You won't get any tax deductions for money contributed to a 529, but withdrawals, including earnings from investments, are tax-free if they are used for tuition or other expenses at a qualified university, college, vocational school or other higher educational institution. If the beneficiary opts not to use the money for schooling, you can name a new beneficiary or withdraw the money yourself.
Most 529 plans offer a variety of investment options. Each state typically chooses a fund manager, usually a major investment company, which invests pooled contributions in mutual funds and other securities. Plans usually offer options for very safe investments or higher yields, so you can choose one that fits your goals. Most plans have some administrative fees, but these vary by state and plan manager.