A 529 plan is a savings program to help parents and others save money for students to use to pay for college. It's named for the section of the Internal Revenue Service code that set up such plans, but 529 plans are created and operated by states. Plans differ by state, but in general, contributions are pooled and invested to earn income tax-free until the funds are withdrawn for college. California, like most states, offers many benefits to the owners of 529 plans.
Anyone Can Contribute
Each 529 account is set up for a specific beneficiary, but anyone can contribute to it. You don't have to be a Californian to contribute to a California 529 and a Californian can create and contribute to a 529 in another state. An individual can contribute up to $13,000 a year to each 529 plan without it being considered a taxable gift by the IRS.
Interest Not Taxed
Interest earned by a California 529 program is not taxed, but California is one of only of only six states with an income tax that does not give a deduction for 529 contributions. Contributions also are not deductible from federal income taxes. That's true whether the 529 plan is in California or another state. California also does not tax interest earned in another state's 529.
A rating firm, Morningstar Inc., as of 2011 ranked California's plan as "above average," with only six states rated higher. California's plan is managed by TIAA-CREF and offers 19 investment options or portfolios, with fees ranging from 0.18 to 0.62 percent. Money withdrawn from a 529 plan and used for tuition or other college expenses is tax-free at both state and federal level.
Use It Anywhere
A California 529 investment can be used at a legitimate college, university or other educational institution anywhere in the country, and any state's 529 plan can be used to pay tuition and expenses at any California institution. The 529 program is so flexible you could set up a California 529 for a child in Maine who ultimately would use it for college in Missouri.
Mostly Stock Investments
California's 529 investment portfolios lean heavily toward stocks. A plan for a typical 17-year-old, for instance, would have about 19 percent of the portfolio in stocks, which often bring higher returns but have greater risks. Contributors, however, can choose safer investments if they prefer. California's 529 plan offers more investment options than some other states.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.