A 529 plan is a federal plan (sponsored by individual states) that has become increasingly popular in recent years.  It is similar to the Guaranteed Tuition Plan except that the beneficiary’s tuition is not guaranteed when they reach college.  Generally, a 529 plan offers more flexibility and control, but is also more risky than the GTP.   A parent or grandparent can set up a 529 plan for a minor and have that gifted amount taken out of their estate, and upon distribution the funds are tax-free.  The person establishing the plan may change beneficiaries during the plan and usually can choose the basic investment program the plan will follow.  Contributions made to a 529 plan fall under the annual gift tax exclusion and donors have an option to consolidate up to five (5) years annual gifts in the first year.  However, this may have major tax implications if other gifting is possible during that time.

Last updated on January 6, 2011 by Glenn Karisch