Every state in the U.S. offers one or more Section 529
college savings plans, either individually or in conjunction
with another state. Each plan is run by a professional
money manager, such as a brokerage firm or mutual fund
company, chosen by the state.
All the plans are alike in one way. Any earnings
accumulate
tax
deferred
and are free of federal income tax if the
beneficiary uses them to pay qualifying higher education expenses
at any accredited college, university, or vocational school in
the U.S. and certain schools abroad. In most states your earnings
are exempt from state tax as well.
A plan for every taste
But each plan is a little different. For example,
certain plans let you choose the way your contributions are invested,
while other plans are highly structured. A third group falls somewhere
in between. Some states let residents take an income tax deduction
for contributions to the plan. Others don’t.
More good news
There is no income cap that limits eligibility to contribute to a 529
savings plan, though if you contribute over $12,000 in 2008 to the same
beneficiary's plan, the amount over $12,000 may be a taxable gift.
However, there’s a special provision that lets you contribute five
times the annual exclusion amount — $60,000 in 2008 — or $120,000 if
you and your partner or spouse each contribute. However you'll have to
wait five years before making another contribution.
Since, in most cases, you don’t have to
live in the state offering a plan to enroll in its program, you
can comparison shop for a plan that best meets your criteria.
