Typically operated by a state or educational institution, a 529 is an education savings plan that permits families to set aside funds on a voluntary basis to meet future costs at qualified colleges and universities nationwide (tuition, fees, books, and supplies required for study). Although contributions are not deductible on an individual's federal tax return, investments grow tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free. Effective July 1, 2011, voluntary employee contributions to a 529 College Savings Plan can be deposited to an employee's 529 College Saving Plan(s) directly from their University pay.
A 529 plan can provide a very easy hands-off way to save for college. Plans work much like a 403(b), 401K or IRA by investing contributions in mutual funds or similar investments. The plan will offer several investment options from which to choose. The account will go up or down in value based on the performance of the particular option that is selected.
Once an individual decides which 529 plan to use, an enrollment form must be completed. After the account is established, contributions may be made to the account by direct payments or automatic deposits (for example, through a direct debit from your bank account or direct deposit from your pay). The ongoing investment of the account is handled by the plan. Plan assets are managed either by the state treasurer's office or by an outside investment company hired as the program manager.
The 529 College Savings Plan offers other benefits in addition to the tax advantages. Individuals have the ability to transfer any unutilized savings to other qualified members of the beneficiary's family. As long as the transfer is to a qualified family member, there will be no tax penalty imposed. Every state has at least one 529 plan available. Each state decides whether it will offer a 529 plan and what it will look like, so 529 plans can differ from state to state. Individuals should research the features and benefits of any plan before investing.
Additional information on 529 plans is available at the resources below.
Saving for College.com