A 529 plan is a tax-advantaged investment vehicle in the United States intended to promote saving for the upcoming higher education costs of a nominated recipient. There are two types of 529 plans: prepaid and savings. Prepaid plans allow one to purchase tuition credits, at current rates, to be used in the future. Consequently, performance is based upon tuition inflation. Savings plans are special in that all escalation is based upon market performance of the principal investments, which usually comprise of mutual funds. The majority of 529 savings plans offer an array of age-based asset allocation choices where the underlying investments become more conventional as the beneficiary gets nearer to college age.

• Funds from a 529 plan can be used for tuition, fees, books, supplies and equipment necessary for learning at any qualified college, university or vocational school in the United States and at several overseas universities. You shell out no taxes on the account’s earnings, the child doesn’t have power of or access to the account and if the child doesn’t want to go to college, you can roll the account over to a different family member, anybody can make a payment to the account, there are no earnings restrictions that may disqualify for an account. Furthermore the majority of states have no age restriction for when the funds has to be used and if the child gets a scholarship, any unemployed funds can be withdrawn without paying any penalty.
• Therefore the main advantage of 529 plans is that the donor can control the account without worrying about what Junior will do will he gets hold of the funds. Moreover, even if there are no federal tax breaks, state taxes are deferred on the principal and are tax exempt if distributed for qualified student benefits in the future. Another advantage of the 529 plan is that the assets in the account are not counted as the estate for estate tax purposes. Therefore people with extensive estates can open more than one account (one account per state is allowed) and relieve some of the estate tax burden.
• It cannot be denied that there are some disadvantages of this plan such as paying a penalty of ten percent if the funds are withdrawn for something other than student education and attract taxes. Each beneficiary needs to have an individual account which means that two people cannot share an account. Although the plan offers some flexibility as far as investments are concerned, the account holder does not have any control once the plan is set in action. Investment savvy people may lose out on some of the benefits enjoyed by directly influencing the investments.
• Choosing the right type of plan is important and some things can be taken into consideration before opting for a particular plan. There are currently 16 states that offer tax deductions on 529 plans; therefore choosing the right state is important. Moreover, the capabilities of the fund manager also influence the returns on the investment and the long term benefits of the same. Flexibility is another important point to be taken into consideration in order to avoid penalties and unwanted taxes.

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