A 529 plan allows you to save for educational expenses for yourself or someone else. The money you contribute is not deductible, but the withdrawals are free of income taxes if they go toward college tuition or costs. Although you may have a menu of investment options available with your 529, individual stocks won't be among the selections.
529 Plan Basics
The Qualified Tuition Program under Section 529 of the Internal Revenue Code began in 1996. Under the law creating 529s, individual states and universities set up and administer the plans. A 529 plan invests the money you contribute into a limited selection of mutual funds holding stocks or bonds. There is no limit on the income you can earn and still be eligible for the plan, and you can designate yourself or anyone else as the beneficiary.
Control of Account
As a 529 plan owner, you control the funds in the account. You can move the investment into one or several portfolios, all with a certain investment theme, degree of risk and volatility. The Minnesota College Savings Plan, for example, offers seven portfolios as 2013. Most states operate websites where prospective college savers can browse plans, learn the investment philosophy behind each, and study historical returns to decide which will best serve their situation.
Prepaid Tuition Plans
There are two basic flavors of 529 plans: college savings plans and prepaid tuition plans. In the latter, you pay in advance for tuition credits at a designated college or university. Prepaid tuition plans guarantee a return that matches the rise in public college tuition, as measured in the state where the plan is offered. This will usually beat returns on savings accounts, money market funds and certificates of deposit.
College Savings Plans
The law establishing 529 plans prohibits account owners and beneficiaries from directing the investment of their funds, other than choosing an investment portfolio. As a result, college savings plans don't offer individual stocks, as they can't act as brokers for account owners. Instead, the plans offer stock, bond or money market funds. Some plans also offer "age-based" portfolios, which gradually shift to less risky investments as the beneficiary approaches college age. The funds don't guarantee a return and are not insured by the FDIC.
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