The Federal government has introduced different types of investment vehicles for helping parents save money to secure a better future for their children. The 529 Plan is one of them and helps parents make a tax free investment for their children's education. Though it has been in existence for years, it has become a popular choice over the years, as people have began to learn the importance of saving money and future planning.

The plan, which has come into effect from 1996, has been named after Internal Revenue Code's Section 529. It is operated by particular educational institutions or by the state.

529 Plan- An Introduction

Someone who is new to the 529 Plan may like to know that it is a popular tax advantaged investment dedicated to helping students meet their college expenses easily. Also known as the €qualified tuition plans€, they are generally sponsored by the state or any state agencies.

In some states, educational institutions also act as the sponsor of the plan. 529 plans are further divided into two distinct categories to help people make their investments as per their needs. College savings plans and prepaid tuition plans are the two options available.

529 plans are available in almost all states. Yet, one may not be able to find both the options in every state. Although 529 plans are applicable nationwide, students who have relocated to different states for studies should inquire the details of the 529 plan applicable to a particular state before enrolling in any of the colleges.

How The Different Types of 529s Work

Each state in US has at least one type of 529 plan for supporting educational requirements. In some states, one can also find both the plans available. Therefore, to make a wise choice, you should have an understanding of both the options that are available to you.

College Savings Plan

The operating method of this plan is quite similar to an IRA or 401(K)s. Sponsors of the plan offer multiple saving vehicles and one just needs to select the option that suits his purpose in the best way. It is recommended to first get an idea of the amount of money that will be required for supporting the expenses.

Selecting a low rate investment choice may not be of any help in the future. The value of the account when you are ready to use the funds are determined by the performance of the account, so you will want to be sure that you invest wisely.

College Prepaid Plans

If your state offers this plan, you just need to plan your child's education wisely and purchase the credits that you think will be enough for supporting a college education. Depending on the money you invest or credits you purchase, you can pre-pay the complete or partial expenses for your child's education.

Both College Prepaid Plans and College Savings Plans offer tax free investments. Just note that the investment is only tax free if the money is used for qualifying education expenses. Any money left over after paying such expenses is subject to be taxed.