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Since their introduction nearly a decade ago, Section 529 plans have revolutionized the way parents, grandparents, and others save for college. Americans have poured billions of dollars into 529 plans, and contributions are expected to keep flowing in the years ahead. What makes these plans so special? The primary advantage of 529 plans is that funds in the plan are free from income tax at the federal level when used to pay the beneficiary's qualified education expenses. Plus, anyone can open a 529 account, regardless of income level or state of residence.

There are two types of 529 plans--college savings plans and prepaid tuition plans. Each works differently, and it's important to understand these differences before you open an account in a 529 plan.

Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.

Fees and expenses are typically associated with opening and/or maintaining a 529 account (e.g., annual maintenance and administration fees, and investment expenses based on a percentage of your total account value.


                                                                                       COLLEGE SAVINGS PLAN

A college savings plan lets you save money for college in an income tax-deferred investment account. The account is managed by an experienced financial institution designated by the state. When you open an account, you name your child (or grandchild or other  friend or relative, as the case may be) as beneficiary. You also choose or are assigned an investment portfolio for the investment of your contributions. You then contribute as much or as little money as you like, subject to the plan's limits. However, all investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.



A prepaid tuition plan lets you prepay tuition expenses at participating colleges for use in the future, allowing you to lock in current tuition costs and gain some peace of mind over spiraling college costs. There are two types of prepaid tuition plans--those that are offered by the states, and those that are offered by colleges. Generally, state prepaid tuition plans are open only to state residents, while college prepaid tuition plans are open to everyone. Note: Unless specifically noted, all references are to state prepaid tuition plans.



There are many factors you should consider when deciding between a college savings plan and a prepaid tuition plan. In the case of college savings plans (which generally allow nonresidents to join), you should compare several characteristics that can make these plans differ from state to state. For example, investment options and flexibility, fees, state tax treatment, and contribution rules can vary widely.



Once you select a particular 529 plan and open an account, you'll need to understand your plan's rules about plan contributions and, later, plan withdrawals. Though most plans operate under the same federal guidelines, there is room for innovation within individual plans. You may also want to understand if it's better to make lump-sum or periodic contributions, and learn about ways to maximize your contributions.



At college time, a 529 plan may impact how much financial aid a student receives. Specifically, parent-owned 529 plans are factored into the aid determination.