529 Plans

The 529 Plan is a savings plan operated by your state to help you save for college-incurred costs. Generally, they are available to any U.S. resident in any state. 529 is the code number of the IRS law under which these plans are covered.

The best part about 529 plans is that the money you invest grows tax-free. Current legislation will keep these earnings tax-free until December 31, 2010. After that, lawmakers will decide whether to extend the 529 code at that time for the savings to continue to grow tax-free.

When the student is ready for college, the distribution from the plan that goes toward college is also tax-free. When the student is ready to go to college, any funds withdrawn from the qualified 529 plan will be distributed 100 percent federal income tax-free if the monies are used for qualified higher education expenses.

If funds are withdrawn and used for any other purpose than education, you will be assessed a 10 percent federal tax penalty.

Some states also let you decide how the money in the 529 account is invested. Other states or plans might give you a few options on what you can invest in based on your goal for the account.

It is very important to check with your state about residency requirements, minimum contributions and fees. Each state runs its own plan and has different regulations regarding 529 plans. You can find this information at your local bank or credit union.

More information:

SavingforCollege.com - A comprehensive list of state plans.

CNN.com article on the best 529 plans.