529 Plans

These state-sponsored qualified tuition programs, offered as prepaid tuition plans or college savings plans, are valuable tools to help finance your child's college education. Prepaid tuition programs allow you to lock in today's tuition rates at participating private and public colleges and universities. College savings plans, on the other hand, offer a variety of investment options, and funds can be used to pay for tuition and other qualified higher education expenses at most colleges and universities nationwide.

While state tax benefits for 529 plans vary by state, all 529 plans offer federal tax benefits: earnings grow tax free, and funds withdrawn to pay for qualified educational expenses are also tax free. The Pension Protection Act of 2006 made this favorable tax treatment a permanent benefit for 529 plans, and the American Recovery and Reinvestment Act of 2009 (ARRA) expands the list of qualifying expenses to include the cost of computer equipment and Internet access..

Contributions to a 529 plan on behalf of a beneficiary are considered a gift for gift tax purposes, and in 2009, up to $13,000 may be given tax free ($26,000 for joint filers). Furthermore, a special gift tax rule allows individuals to make a tax-free, lump-sum contribution to a 529 plan of up to $65,000 in 2009 ($130,000 for joint filers); however, you will be unable to make tax-free gifts on behalf of the same beneficiary for the next five years.

Under a special gift tax rule, you can gift up to $65,000 per beneficiary ($130,000 for a married couple) in a single tax year to a qualified tuition program and avoid all transfer taxes.