If you have heard about 529 plans, you may be overwhelmed with the overload of information that is available on them and somewhat confused on which 529 plans are best for your family. First of all, it is important to know what the key benefits of 529 plans are and how they compare to other college savings plans, as well as learn the impact of 529 plans on financial aid and scholarships.

529 plans are clearly the best way for families to save for college. While other savings options, such as Coverdell Education Savings Accounts and UGMAs, are also available, 529 plans must be considered by any family that has children and income available for savings.

Key Features of 529 Plans

What are the main benefits of 529 plans? Contributions in most 529 plans grow entirely tax-free, meaning no capital gains taxes paid. About half of the states currently offer tax deductions on contributions into their 529 plans.

Who can contribute to a 529 plan? Anyone, regardless of income level, can contribute, whether the 529 plan is for their own kids or that of friends or family.

What is the difference between 529 prepaid plans and 529 savings plans? 529 prepaid plans are contracts that you buy to lock in today’s tuition rate at public and some private colleges within a particular state. There are restrictions on using funds in 529 prepaid plans for out-of-state colleges and the impact on financial aid is worse than if you invest in 529 savings plans. 529 savings plans are made up of mutual funds that grow tax-free and can be used for any Qualified Higher Education Expenses, meaning tuition, room and board, and other miscellaneous expenses associated with college.

What is the minimum and maximum investment in 529 plans? You can invest as little as $25 to open a 529 plan and invest over $300,000 per beneficiary, but not all at once.

What are my choices for 529 plans and investment options? There are currently over 75 529 plans and over 700 different investment options to choose from, with many well-known fund managers, such as Fidelity, Alliance, Strong Capital and Merrill Lynch.

What are the costs associated with investing in 529 plans? 529 plan costs range from 0 – 2.5% of your assets per year, plus front and/or back-end sales fees if you buy plans through brokers. So if you have $100,000 invested and the expense ratio is 1.5%, you pay $1,500 in that year. This is standard practice in the mutual fund industry. Selecting plans with lower expense ratios is generally a smart strategy, although how a plan performs also impacts whether that $100,000 grows rapidly or not. The states that govern the plans as well as the 529 plan fund managers receive this compensation for administering the plan and managing your money.

How do rebate programs work with 529 plans? Rebate and tuition discount programs like Upromise, Babymint and Sage Scholars offer parents “kick-backs” of 1-10% on purchases made with affiliated retailers. Such rebates may be invested in specific 529 plans.