GraduateThanks to the Pension Protection Act the 529 looks like it is here to stay as opposed to phasing out in 2010. A 529 plan is clearly recognized as a college education savings plan, but the benefits don’t stop there. For those unfamiliar with how a 529 plan works, the general premise is similar to that of a Roth IRA for education. Then plan allows (generally) after-tax contributions which are then allowed to grow not only tax-deferred but federally tax free provided the distribution is for qualified education expenses. The plans are different among each state and run by different investment companies so the specific investment choices do vary.

While it is easy to see how setting one of these up for your child may be a great way to start saving for college, there are many other benefits that don’t necessarily have to be for a child. One of the best benefits offered by most plans is the ability to change the beneficiaries on the plan, most of the time even allowing the account owner to be their own beneficiary. Let’s say you have two children–what this means is that if you set up the plan for child A and they decide not to go to college, you can rename child B as beneficiary. This can continue as well, if no children head to college you can typically name yourself or your spouse. Looking even further, you can let the account continue to grow for even more years then naming your grandchildren. This has been one fear I’ve seen come up in many instances, that if the fund is set up and the original child does not attend college then the money has to be taxed and the 10% penalty assessed, which is not true.

Changing, or naming the beneficiary to an adult or yourself is a great feature because a growing trend is for people to seek education as they age. Some people find the need to get that graduate degree at 40 in order to advance their career, others want to retire and become a professor at their alma mater. You don’t have to strictly use 529 proceeds to finance your child’s college, you can use it for yourself in the future as well, or even pass it on to grandchildren.

One other benefit that is becoming more common is the use of tax deductions and tax credits offer by certain plans if you are enrolled in your state’s plan. For example, in Indiana starting in 2007, you can receive a 20% tax credit on the first $5,000 that is contributed to an in-state 529 plan. That means you have a maximum $1,000 tax credit you can obtain each year by contributing to the plan. Most other plans also provide some sort of tax deductions for contributions as well.

But what happens if you never have kids or never seek further education yourself? All is not lost because the 529 can have significant tax benefits at your death as well. Assets held in a 529 plan are generally not subject to estate tax. That means any contributions made to the program, in fact, your entire account value if you are the only one funding the account, is not included in your estate.

While the number of benefits are many, it does not come without some words of caution. First is that if you need to access the money, unlike an IRA, even if you are retired and over 59 1/2 the distribution will be taxed and assessed a 10% penalty if used for a non-qualified expense. Second is that every plan is different. You generally have to participate in your own state’s plan in order to receive the tax benefits on contributions, but it is possible that your state does not have the best investment options when compared to another state. Also, every plan has their own set of rules and restrictions that may not ultimately benefit your situation.

Finally, people need to put their priorities in order when it comes to saving for multiple goals such as college and retirement. I feel that younger adults should focus on adequately funding their retirement accounts first, and if that is on track to fund other goals such as college savings. When push comes to shove you can borrow money to obtain an education. When you retire, what you’ve saved is what you have to work with. There are no retirement loans available at the bank or through the government. When the time is right to open a 529 for your children or yourself make sure to take the time to explore all of the options available to you in order to make sure the plan will work for your needs.