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Frequently asked questions about 529 plans

Q. What's so great about 529 plans?
A. You never have to worry about annual taxes on dividends and gains, and withdrawals are tax-free too. What's more, if you invest with your own state's 529, you may get state-tax deductions on contributions or exemptions on withdrawals.

Q. Can anyone open a 529 account for any child?
A. Generally, you ("the account holder") can open an account on behalf of nearly any child ("the beneficiary"), regardless of your income. Grandparents, for example, can save on behalf of grandchildren. You can even put away money for someone who's not a family member. A handful of states open their plans only to state residents -- but most are available to everyone.

Q. Can two people open an account for the same child?
A. You can open more than one account in a single state for the same child, and more than one person can fund a 529 for the same beneficiary. No matter the number of accounts, the state's maximum contribution limit still applies to the beneficiary. States don't have to count balances in out-of-state accounts when determining whether you've met your limit, but some have started doing so.

Q. What if I need to tap the plan?
A. You can make a withdrawal anytime, but you'll pay taxes plus a penalty on the earnings -- usually 10 percent -- if the money is not used for higher education.

Q. Does my child have to go to a state school?
A. No. You can use the money at any accredited degree-granting school, whether it's private, public, undergraduate, or graduate.

Q. What kind of educational costs can be paid using this money?
A. In all states, tuition qualifies. Most states also permit 529 money to be used for other costs, such as room, board, fees and books.

Q. What if my child doesn't go to college or has money left over?
A. You can take out the money, paying taxes and penalties. In most states, you can leave money in the plan indefinitely, in the hope that your child will eventually go to college. A third option is to name a new beneficiary on the account. If your child dies or becomes disabled, most states will waive penalties on withdrawals.

Q. Can I switch investment options?
A. Not without going through the rollover process described above. An easier alternative is to open another account for the same beneficiary and invest future contributions in a different fund.

Q. Can I also fund a Coverdell Education Savings Account?
A. Absolutely -- that restriction changed at the beginning of 2002. You can contribute up to $2,000 annually to a Coverdell, regardless of how much you contribute to a 529.

Q. Can I open a 529 account even though I don't yet have children?
A. Yes, you can take advantage of a 529 plan now. Just name yourself the beneficiary - you can change the designation to a child later on. You'll generally be able to take a state income-tax deduction if it's available in your state (it is in Maryland), even though you're currently making the contributions for yourself. If you never have kids to spend the money on, you can use it for your own education or switch the beneficiary to another family member - your spouse, perhaps, or even a cousin.