529 Plan

529 plans have become one of the more popular options for saving for college. Though plans differ from state to state, they are all exempt from federal income tax.
A 529 plan is a state-operated investment plan that offers a federal tax-free way to save money for college. Authorized by Congress in 1996, they are officially known as qualified tuition programs (QTPs), but commonly referred to as "529 plans,"  "state 529 plans," or "section 529 plans" after the section of the IRS code that provides the plans' special tax breaks.

There are two types of 529 plans...(1) college savings plans and (2) prepaid tuition plans. Every state has at least one of these two options and many states offer both. College savings plans let parents use their plan funds for college expenses at any college. Prepaid tuition plans let parents lock in future tuition at in-state public colleges at present prices.

529 Plan Facts

• Some states waive state taxes for residents, other states allow deductions on contributions.
• Earnings from a 529 plan are exempt from federal taxes, as are any withdrawals, as long as they go toward paying college costs.
• High maximum contribution limits. Some as high as $250k per beneficiary
• If funds are withdrawn for purposes other than education, the earnings are subject to a 10% penalty as well as federal income tax. States may also assess their own penalties.
• Grandparents: contributions are considered completed gifts and are excluded from their estate. Grandparents can also switch beneficiaries to other grandchildren.

Each 529 plan has its own set of rules and restrictions which are subject to change.