529 College Funds

The rush to save for college education was seen in the US for the first time in the 80's when mutual funds made a breakthrough entry into the market. For a second time the process of college funding was revolutionized when in 1996 the 529 college funds were introduced through which the augmentation of money was ensured along with the stimulation of the economy. 529 funds can be broadly divided into two categories -prepaid plans and savings funds, done so for ease of use by beneficiaries.

Prepaid plans enable a person to purchase prospective future tuition at the existing rates. This plan makes sure that the rates are locked and despite an inflationary future trend in the economy the rates will remain as it is and there would be no losses. But the major drawback of this plan is that the beneficiary can't choose the institution of his choice unless that establishment is a participant in the same plan.

In comparison, the savings plans offer more flexibility and enables the recipient to opt for the institution of his choice. Funds from these plans can be used to sponsor expenses on boarding, books, supplies and a plethora of other requirements of education.

The most significant benefit that the 529 funds offer is the liberal method of taxation. All 529 funds are exempt from federal tax as long as the money is used for educational purposes. Investment in these funds can be done in different ways - investing in a pool of stocks and shares that change with the change in the beneficiary's age, a pool of fixed shares and stocks etc. Any one who invests would not have the right to manage the account but he or she can definitely go through various investment plans. Once an investment is done it is really up to the investor whether he wants to change the beneficiary or the plan. As long as the withdrawal is affected in order to pay for eligible educational expenses in the country, the amount is not taxable.

When the contributor invests the invested sum is considered as a gift for the beneficiary but no gift-tax is charged on this. In fact in certain states the contribution made is deductible from the state tax. With so many facilities made available to both guardians and their wards the trend is to go with the flow and invest in 529 college funds as quickly possible.

529 Plans