From the FAQ section of this web site:
What’s so great about 529 plans? You’re looking at four main advantages.
First, you get some nice income tax breaks. Your investment grows tax-free for as long as your money stays in the plan. And when a withdrawal is taken to pay for the beneficiary’s college costs, the earnings portion of that withdrawal is taxed to the student. Assuming that the student isn’t earning hundreds of thousands of dollars running a dot-com company out of her dorm room, you should save taxes with her lower income tax bracket. Your own state may offer some tax breaks (like an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment.
Second, you the donor stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. (The state is required to assess a penalty, however, any time you make a “non-qualified” withdrawal.) Compare this level of control to a custodial account under the Uniform Transfers to Minors Acts (UTMA).
Third, a 529 plan can provide a very easy hands-off way to save for college. Obtain the program information packet for the state you reside in, and consider some other states too (spend some time looking around this site, talk to your financial adviser, etc.). Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer’s office or by an outside investment company hired as the program manager. You won’t even receive a Form 1099 to report income until the year you make withdrawals.
Finally, everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $100,000 per beneficiary). Generally, there are no income limitations or age restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan for yourself! There is no reason why you cannot be the beneficiary of your own account.
The plan is designed to encourage Vermonters to save for college or other post-high school programs. Investors can contribute even small amounts, and favorable tax treatment may help boost growth of contributions and earnings.
The plan is managed on behalf of the state of Vermont by the Vermont Student Assistance Corp., a public nonprofit corporation created by the state in 1965 to provide Vermonters with the information and financial assistance they need for education beyond high school. TIAA-CREF Tuition Financing, Inc. (TFI) is investment manager for one of the Plan's two savings Options (the Managed Allocation Option), as well as program administrator for the other Option (the Interest Income Option). TFI is part of TIAA-CREF, a New York-based financial services organization with more than 80 years of experience and more than $250 billion in assets under management.
How does the plan work?
Account owners choose one of two investment Options:
The Managed Allocation Option
Plan contributions made to the Managed Allocation Option will be invested in special portfolios based on the birth dates of Account beneficiaries, using stocks, bonds, and money market mutual funds in various percentages. As your Account beneficiary nears college age, your money will be invested more conservatively. The goal is for the fund to outpace tuition inflation. As with other equity and debt investments, the value of your Account is neither insured nor guaranteed, and principal and returns will fluctuate. So, at any given time, your Account may be worth more or less than the amount of your contributions.
The Interest Income Option
Plan contributions made to the Interest Income Option will be invested in an interest-bearing note from VSAC. The goal is to provide investment returns that are at least equal to the 91-day Treasury Bill rate. Under the Interest Income Option, the value of your Account is neither insured nor guaranteed, and principal and returns will fluctuate. So, at any given time, your Account may be worth more or less than the amount of your contributions.
"New College Savings Plan has Advantages" This article in the Rutland Herald describes the 529 saving plan.
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