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529 Plan

A 529 Plan is an educational assistance fund authorized under the US Tax Code. A donor is permitted to contribute to the plan of any individual. The money grows tax free but gain is taxable at the student's income tax rate when used to pay for qualified educational expenses.

Expanded Definition

Funds contributed to a 529 Plan are no longer part of the estate of the donor for estate tax purposes, but the donor continues to control the account and can reclaim the funds by paying a penalty. If the student does not use all of the funds, the plan can be transferred to another relative penalty free. The plan seems intended to allow contributions from parents and grandparents for the benefit of the student, but the law allows anyone to contribute to the plan. Only transfers and distributions are controlled.

Many states offer their own plans. They often are free of state income taxes for residents of the state.

Most plans now offer an array of investment opportunities. Funds can be invested in equities, fixed incomes or in target funds corresponding to the student's first year in college. Fidelity and other mutual fund companies offer plans.

The funds may be used at a wide variety of institutions. Not just colleges, but also many technical training schools qualify. The funds must be spent for a legitimate educational purpose such as tuition or books.

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