Released: February 12, 2007

529 plans a top savings option

Source: Kathy Chu, USA Today (Free Registration)

For years, as college costs have climbed to backbreaking levels, more families have begun socking money in tax-advantaged 529 savings plans. Now, as these 529 plans mark their 10th anniversary this year, they are fast becoming the principal way for parents and grandparents to save for college.

Why? Costs have dropped. Investment options have improved. Perhaps most significantly, Congress has permanently extended the most enticing feature: All the money you pull out of 529s for college — your contributions, plus the earnings — is free of federal tax.

State-sponsored 529 savings plans let you invest in a menu of stock and bond funds, just as 401(k) plans do. Forty-eight states and the District of Columbia offer at least one 529 savings plan. The plans aren’t limited to in-state residents; you can generally invest in any state plan you want. But your state’s plan will often reward you with a deduction or other state tax break.

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