What are the advantages of a 529 college savings plan?

Tax deferral can have a big impact on the growth of an investment. A state-sponsored 529 College Savings Plan or Coverdell Education Savings Account (CESA) allows your contributions to grow tax-deferred. (Some states allow contributions to be partially or completely deductible.) You'll also enjoy tax-free distributed income from the plan as long as you use those distributions for qualified education expenses, such as tuition, fees, or room and board at higher education institutions.

There is no limit on contributions to a 529 or CESA, but some states impose limits once the plan assets reach a defined maximum (typically $230,000 to $500,000). Under a special election, you may make contributions per beneficiary in a single year without triggering a federal gift tax by accelerating five years' worth of contributions, based on the applicable gift tax exclusion amount.* Use our college savings calculator to estimate your savings based on your anticipated monthly contributions.

Assets are professionally managed by fund managers selected by the state. Participants can choose from two to almost 30 mutual fund-type investments. The main contributor controls the account regardless of the beneficiary's age.

*This gift is viewed as an accelerated gift over five years. Any other gifts to the same beneficiary by the contributor within five years may result in a federal gift tax liability. If the contributor dies within the five-year period, a prorated portion of the contribution may be included in his or her taxable estate for federal estate tax purposes.