529 Plans and Personal Funds

Saving for college is the best way to prepare for your education expenses. A few dollars tucked away in an interest-bearing account can really add up in no time. You may have heard of 529 plans. These plans have many benefits, including:

The 529 Plan (named after its section number in the IRS code) is a savings plan for college education. You have a couple of options when you open an account. One option lets you prepay tuition at a qualified educational institution at today's tuition rates. Another option lets you save money in a tax-deferred account (earnings only) to be used to pay for education at future tuition rates.

The idea, with either option, is that the investment earnings will grow to meet the higher costs of future education. The savings account option is typically considered the more attractive of the two and is what we will focus on in this article.

The 529 plan is a state-sponsored investment program, meaning that the state sets up the plan with an asset management company, and you open a 529 account with that asset management company according to the state's predetermined plan features. You are the owner of the account, and the child for whom the account is set up is the beneficiary. You won't deal directly with the state, but rather with the asset management company.

One thing to consider is if you apply for financial aid, your 529 account may affect the amount of award for federal aid. Additionally, if you use the money for something other than higher education costs, you will pay tax at your rate plus a 10 percent penalty.