Investment Options:
Section 529 savings plans have a preset menu of mutual fund investment choices. Most often, a state’s Section 529 plan will contract with a mutual fund company to manage the plan. In turn, this company’s mutual funds will be the extent of available investment choices.Many of the Section 529 savings plans offer “age-based” investment options, which allocate your investment between stock, bond, and money market funds based on your child’s age. As they get older, the fund becomes more conservative in its investment mix.
You are permitted to change your investment strategy only once in a 12-month period. Exceptions are made if you move your assets from one state’s plan to another, or roll the Section 529 plan over to a new beneficiary.
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. Contributions are made with “after-tax” dollars and will not lower what your owe the IRS.
However, thirty-three states offer an 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.
Additionally, Section 529 plans allow for some fairly advanced estate tax planning strategies for families trying to avoid inheritance taxes.
