Section 529 plans are state-sponsored education savings plans that allow flexibility in choosing a school and the opportunity for late starters to make sizable investments while reaping tax breaks. These plans allow individuals to invest in a predetermined pool of stock and bond investments. Most plans will require you to divide your investment according to a given asset allocation, which may be based on your risk tolerance or determined by your childs age. In general, when asset allocation is based on age, it will be more aggressive for younger children and less aggressive for children nearing college age.
Lifetime contribution limits to Section 529 plans vary from state to state, but they typically exceed $200,000 and offer some flexibility on when you can contribute. All earnings in the account grow tax deferred. If you live in the state where the plan is administered, you also may be eligible for state tax deductions. Withdrawals are tax free if used to pay for qualified education expenses. Nonqualified withdrawals will be subject to a 10% additional federal tax along with ordinary income taxes.
Section 529 plans are just one of the options you have for education savings. They offer a great deal of flexibility in exchange for a higher level of investment risk. If youre getting a late start or if your child is unsure of which college he or she wishes to attend, a Section 529 plan may be your best choice.