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Special Report

Reviewing 529 Plan Benefits

Here's a short list of our favorites.

A new year means new resolutions, and even if you made a slew of 'em in January, it's never too late to consider adding a few more. Particularly welcome, of course, are the kinds of commitments that can help you prepare for a comfy retirement or important nearer-term goals such as buying a house or helping your kids afford a college education.

When it comes to that latter goal, there are few better options than 529 college savings plans. Proceeds from these plans can be used at any college in the country, and though there are often compelling reasons to invest in the state where you live, investors are free to comparison shop among the nation's plans, separate the pricey offerings from the more cost-conscious ones, and buy into a plan that best suits their (and their beneficiary's) needs.

That flexibility heightens the allure of 529 plans, but there are plenty of other reasons to use them as the cornerstone of your college-savings fund. Below, we highlight three important incentives that should inspire serious savers to pick a plan and begin investing in it posthaste.

Tax-Free Withdrawals
Ah, "tax free"--two little words that every investor loves to hear. Similar to the tax treatment of Roth IRAs, the federal government provides a nice incentive to invest in 529 plans by making qualified withdrawals totally exempt from federal taxes. That's right: totally exempt. Eligible withdrawals include nearly all educational expenses, including room, board, books, and tuition. (Pizza delivery charges, keg deposits, and ill-advised loans to deadbeat roommates are, alas, excluded.) Most states follow the federal government's tax-treatment lead, too, providing an extra layer of appeal for residents of states that assess income taxes.

Tax-Deductible Contributions
To paraphrase a question popular with used-car salesmen, what's it going to take you get you into a 529 plan today? If tax-free withdrawals aren't quite enough to motivate you, how about a tax deduction for your contributions? Though not every state in the union sweetens the deal in this way, about half of them will allow you to deduct at least a portion of the amount you invest from your taxable income. Some states (such as South Carolina, West Virginia, and Colorado) are especially generous, allowing you to deduct every penny you put in, up to the plan's annual contribution limit. Most aren't quite that generous, but still, any tax deduction for contributions represents an immediate return on your investment.

This perk, by the way, is a particularly good reason to consider investing in your home state's plan. Not surprisingly, states that allow deductions for contributions require that you invest in their plan to receive the benefit.

Matching Contributions
Still not convinced that 529 plans are the best way to build a college-savings fund? Well, then, have I got a deal for you: free money. Move to Michigan, Minnesota, or Louisiana, and the state government will provide a matching contribution. Yep, similar to the match many employers deposit into their workers' 401(k) accounts, these states kick a little something extra into your 529 plan. Michigan will match your first $200 in contributions, while Minnesota will chip in with up to $300 a year for families who qualify. Bayou Staters, however, have the biggest reason to cheer. Indeed, depending on how much money you make, the state will provide a match of up to 14% of your contributions. (The minimum is currently 2%, so even the state's high-income earners can participate in at least a portion of the state's match game.)

Act Now!
The above are just a few of the many benefits that come with investing in 529 plans. There are many others, and we'll be highlighting those throughout the year. Still, the best reason to participate in a plan is simple and straightforward: College ain't getting any cheaper. Investing in stocks and bonds through 529 plans (which are really just tax-favored collections of mutual funds) is a smart, sensible way to build up a college fund over the long haul.

Indeed, when it comes to that achieving that particular goal, there really isn't a better way to go.