Investment Options:
The investments in Section 529 Prepaid Tuition plans are managed by the states that offer them. The states’ only promise is to make an equivalent amount of tuition available in the future. Any excess or insufficient returns are not passed on to the consumer.
Tax Benefits:
The biggest tax benefit of the Section 529 plan is that it allows for tax-deferred accumulation, and tax-free withdrawals for qualified expenses. In other words, you do not have to pay tax on any of the annual growth of your original investment if the money is used for education.There is no Federal “tax deduction” for putting money into a Section 529 plan. In other words, contributing is done with “after-tax” dollars, and will not lower what you owe the IRS.
However, thirty-three states offer a income tax deduction to their residents for funding a Section 529 plan. Often, this deduction is limited to using your state’s plan, as opposed to a plan offered elsewhere.
Within Section 529 plans, there is also a special provision that allows individuals to make five years’ worth of contributions ($60,000 per adult / spouse) into the plan in one year for one beneficiary, without owing a gift tax on the amount. A gift of this amount requires a special election to be made on a Federal Form 709 in the year of the initial gift. Any additional gifts to that person in the following five years, even if not into the Section 529 plan, will likely trigger a gift tax on the excess amount.
