In 2010 less than 3 percent of families contributed to a 529 plan. A recent survey found that about 70 percent of Americans don’t know what a 529 plan is. With the growing costs of higher education, starting a 529 plan can help give you a head start when it comes to paying for your child’s college tuition and expenses.

What is a 529 plan?
According to U.S. Securities and Exchange Commission: “A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan.”

There is a wealth of information out there that can be overwhelming. So let’s cover the basics to get you started:

Who can open a 529 plan?
Any U.S. citizen or resident over the age of 18 can open up a 529 plan for the intended recipient, including for oneself. Accounts can be started for as little as $25 depending on individual state requirements. Anyone can donate to the plan and there is no age limit on when you can create a 529 plan for a beneficiary.

In general, people open accounts for their children or grandchildren. More than one 529 plan can be opened in the beneficiary’s name as long as it doesn’t exceed the state’s maximum contributions for the account which range from $200,000 to $400,000. Once the maximum amount to the plan is reached, deposits will no longer be accepted.

What are the tax benefits?
As stated on the IRS website, one of the major benefits for creating a 529 plan is that “earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. Contributions to a 529 plan, however, are not deductible.”

Am I only restricted to my state’s plan?
Most people assume they can only sign up for their plan in their home state but that isn’t necessarily true. You can review different states’ plans at Saving For College.

Have you opened up a 529 plan? Comment below if you have more questions about starting a plan.

For more info on financial literacy for children you can follow Walter the Vault

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Created by nationally recognized millennial money expert Tonya Rapley, My Fab Finance is a leading financial education and lifestyle blog for millennials who want to become financially free and do more of what they love.