It may be tough to save money for your kids’ college fund. To help you just a little, the U.S. offers the 529 Plan, which is a tax-advantaged investment vehicle designed to encourage saving for your child’s future education. It’s named after section 529 of the Internal Revenue Code. Although states sponsor 529 plans, recordkeeping and administrative services are generally delegated to a mutual fund company.
There are two types of 529 plans – prepaid and savings.
- Prepaid plans allow you to purchase tuition credits, at today’s rates, to be used in the future. Therefore, financial performance is based upon tuition inflation.
- Savings plans are different because all growth is based upon market performance of the underlying investments. Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the child gets closer to college-age. They also offer risk-based asset allocation options where the underlying investments maintain the same equity-to-fixed-income ratio regardless of the age of the beneficiary. Many savings plans also offer a stable value or guaranteed option designed to protect an investor’s principal while providing for some investment growth.
Source: Internal Revenue Service