College education is so important that the government helps folks save for it. A 529 plan is an investment for a child's education that is put aside in a mutual fund and grows in the account free of federal income tax. The money is withdrawn from the plan when the beneficiary is ready for college and used to pay tuition and other school related costs.
There are two kinds of 529 plans:
The quality of these plans varies from state to state. Fortunately, you are free to invest in any state's plan, no matter where you live. And if you move to a new state, you can continue investing in the same plan.
A 529 account does not affect the beneficiary's eligibility for financial aid. It remains an asset of the account holder and not the beneficiary. These accounts do have strict limitations on what they can be used for, including tuition, fees, books and equipment required for class. The money may be used for room and board only if the beneficiary attends school at least half the time and the amount is dictated by what the educational institution uses to compute the cost of attendance.
An investor can start a 529 account for any child, related or unrelated. The
investor can change the beneficiary at any time. So if you start a 529 for one
of your children who later decides not to attend college, you can designate that
money to be used by any other college-bound child.
The amount you can contribute to a 529 funds for a child differs from state to state, but they can be as much as $265,000.
You can contribute up to $2,000 a year to a Coverdell education savings
account for your child, as long as your income is under $190,000. Each child can
receive a contribution of only $2,000 a year. So if Grandma puts in $2,000 this
year, you won't be able to contribute until next year. These accounts can be
opened with any financial institution and invested in anything from savings
accounts to mutual funds.