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How Does a 529 Plan Work?

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Quick Answer

According to Savingforcollege.com, a 529 plan is a type of savings plan intended to help families save money for the cost of a higher education. The plan was named after Section 529 of the Internal Revenue Code and is operated by educational and state institutions.

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Savingforcollege.com notes that a 529 plan from a specific state doesn't change if the student decides to go to an out-of-state college. It's recommended that students check to see if the schools they are thinking of attending are eligible under the rules of the 529 plan.

A state has the right to decide whether or not to have a 529 plan, how many plans to offer and what the features of the plans might be. According to Savingforcollege.com, a student and his family should examine and compare the benefits and the features of 529 plans before investing in them. Tax benefits and tax incentives associated with investing in a 529 plan apply not only to plan participants, but to the investors as well.

There are two different types of 529 plans: prepaid plans and saving plans. Prepaid plans allow families to prepay either all or a portion of the costs of attending a private or public college either in-state or out-of-state. The savings plan includes several investment options and works similarly to a 401K or IRA plan, notes Savingforcollege.com.

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