Parents and grandparents saving for college have an opportunity to put money aside in a tax-advantaged plan.
Section 529 plans are available in all states and the District of Columbia and allow you to either prepay or contribute to an account for paying a student’s qualified education expenses. Among the advantages:
- Qualified withdrawals are free from federal tax and the earnings are allowed to grow tax free.
- You can change from one type of investment to another within the plan.
- Family members, such as grandparents, can contribute and benefit by reducing their taxable estates.
- The student or the student’s parents still may be eligible to claim federal tax credits — the American Opportunity (formerly the Hope Scholarship) or the Lifetime Learning credits.
- The designated beneficiary of an account can be changed to another member of the family.
There is no federal tax deduction for contributions to these plans (although some states do allow deductions).
Note: Section 529 investors should consider the investment objectives, risks, and charges and expenses of the municipal fund security before investing. More information about municipal fund securities is available in the issuer’s official statement; which should be read carefully before investing.