Saving for College with 529 Plans

Parent's question

What is a 529 plan? I have heard people talking about it as a good way to save for children's college education.

Our answer

A 529 plan is a great way to save for your children's education. Grandparents, relatives and even friends can also contribute to a plan.

There are two types of 529 plans: prepaid tuition plans and savings plans. Prepaids let you pay at today's rates for future tuition. For example, if you buy a year's tuition now at a state college, it will pay for a year's tuition when your child is in college – even if the tuition rate has doubled. Typically, college savings plans build by investing in mutual funds.

Every state has a 529 plan. In Michigan, there are two: the Michigan Education Savings Program and Michigan Education Trust.

You definitely should investigate 529 plans, as all withdrawals are exempt from federal taxes, and many are exempt from state taxes.

And, before choosing, it's important to do considerable research. You especially need to know the advantages and disadvantages of each plan. Be sure to study carefully the tax implications of both plans.

Discover more at www.finaid.org and www.collegesavings.org – and check out our Metro Parent article for more on the differences between the MESP and MET.

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