- A 529 plan is a type of investment account that you can open strictly for the purpose of saving for a child's college expenses. Every state offers this type of account for people who wish to save for a child's education. With this type of plan, you contribute with money that has already been taxed. Then the earnings from investing do not incur taxes. As long as you use the money to pay for education expenses, you will never have to pay taxes on the money again.
- The individual retirement account is primarily for individuals who wish to save for retirement. However, you can also use the money in the account to pay for education expenses for you or a loved one. When you use the money in the account for education, you will not have to pay the 10 percent early distribution penalty that normally comes with taking money out before the age of 59 1/2.
- When it comes to 529 plans, you can choose between two different types: a prepaid tuition plan or a college savings plan. With a prepaid tuition plan, you typically buy credits that you can use to pay for tuition at in-state universities. You typically have to go to college within the state with this type of plan. With a college savings plan, you simply save money and invest it, but you do not have to go to a particular school.
- When making the decision to set up a 529 plan or put money into an IRA, consider the impact it can have on financial aid. If you make below a certain amount of money and have few assets, your child could qualify for financial aid from the government. When determining eligibility for financial aid, the government will take into consideration assets in a 529 plan. However, money in an IRA will not be counted toward this calculation because it is a parent's retirement nest egg.
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Types of 529 Plans
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