Earnings and interest on the money grows tax-free, although contributions are not tax-deductible on federal tax returns. (Some plans allow deductions at the state level.) Distributions are also tax-exempt as long as the beneficiary uses the money for college-related expenses, such as tuition, books and room and board.
Data from the College Savings Plan Network show there are roughly 12 million 529 accounts, with an aggregate value of $250 billion. The average account size is about $21,000.
Given the high cost of college, it's no wonder parents are taking advantage of 529 plans.
According to College Board, the average yearly cost for tuition and fees at a public college for in-state residents is $9,139. For out-of-state residents, that average cost jumps to $22,958. Private universities average $31,231 annually. And those amounts don't even include things such as housing, food and textbooks.
Age-based portfolios in 529 plans basically work like this: You pick a portfolio based on your child's age or the year he or she will need the money—say, 2030—and the portfolio automatically moves gradually to less risky investments the closer it gets to that year.
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