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Mellody Hobson

I’d like to make sure that my daughter doesn’t accumulate the same amount debt from attending college when she gets older that many people in my family have.  Should I be investing in a 529 on her behalf?   Erika – Chicago, Illinois

In layman’s terms, 529 plans are simply investment accounts where your money can grow free from federal income tax and withdrawn federal income-tax free if used for “qualified higher education expenses.” These expenses are laid out in detail in each states particular 529 plan offering, of which there can be many to choose from. Another great perk of 529s is that many have added state tax benefits. For example, residents of Illinois who contribute to that states’ 529 pay no state tax on earning and withdrawals for qualified expense and contributions of up to $13, 000 per parent, per year are tax deductible.  But beware, if you decide to use this money of anything other than education you will be asked to pay the taxes on your earning and you’ll be hit with a 10% federal tax penalty.

Since each state can have several options for these 529 Plans, how do you go about finding one that is right for your particular situation?

Okay, let’s break down the two types of 529 plans so that folks won’t get the feel of being overwhelmed, because with so much information available it definitely can be overwhelming. Over 12 million 529 plan accounts have been opened since the tax code that the plan gets its name was refined in 2001, so you are in good company.

First, we have the Pre-Paid Tuition Plan. According to the College Saving Plans Network these are only currently offered in 12 states. So if you go this route your choice will be limited simply by its restricted availability. Basically, this plan allows its savers to purchase college credits at participating institutions at current prices. Essentially you are locking in today’s prices for your child’s future education. A big benefit of this type of 529 is that the state or education institution that offers the plan will in most cases guarantee the investment. The big downside to this plan is that there will likely be residency requirements. So if you don’t live in one of the 12 states that offer this plan you are out of luck.

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