Most people know they can save for their children's collegeeducations through a 529 plan, but what isn't so widely known isthat 529s can be used to pay for adults to go back to school aswell.

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A 529 plan is an investment account that allows people to setaside money, pre-tax, for college expenses. Individuals can sign upfor their own state's 529 plan or shop around to other states. Manycompanies give their employees the opportunity to deposit moneyfrom their paychecks into a 529 plan.

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“There's in excess of $160 billion invested in 529 accounts,”says John Heywood, principal and head of the Vanguard EducationSavings Group.  Between 25 percent and 50 percent of alldollars people save toward their kids' or grandkids' college fundsis saved in a 529 plan, he says. “The penetration of this productas a tool for savings has been substantial, starting from virtuallyzero in 2001.”

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So why should you invest in a 529 plan? The obvious answer isthe attractive tax structure, both at the federal and state level.All 50 states offer a 529 plan, but every state treats their plan abit differently. Some offer tax credits. Others offerdeductions.

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All 529s allow you to put money in tax free, and income earnedon those funds is tax deferred.  If those funds are usedto pay for educational expenses, those funds are tax exempt.

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Money in a 529 plan can only be spent on post-secondaryeducation. The money can be used to buy books and even pay room andboard at school.

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Money saved in a Coverdell Education Savings Account can be usedto pay for all types of educational expenses—including gradeschool, secondary school and college—but the money has to be spentby the time the recipient turns 30 years old. The money in a 529plan has no age restrictions. If your child decides not to go toschool immediately, they can use the funds whenever they want.Those funds also can be transferred into the name of another child,grandchild or other relative with no fuss.

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One big advantage to saving in a Coverdell account is that aperson can choose their own investments. The downside is that aparent can only deposit $2,000 a year into the account, which wouldmake it hard to save the $25,000-plus a year needed to pay for acollege education, Heywood says

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Drawbacks

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Some opponents of 529 plans point out they charge higher feesthan mutual funds.

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“Most states put those out to bid and those prices go down,” hesays. “They are just a hair more expensive.”

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Another negative of a 529 plan is that they can't be used astrading accounts. They must have a specific list of investmentspeople can choose from, and they can only switch those investmentsaround once in a calendar year, he says.

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 “There are very limited investment options. You can'tjust invest like you would in a Scottrade account or the fundfamily you like. You are given some limited options on theinvestment side,” says Mark VandeVelde, CFP, wealth partner atHefty Wealth Partners in Auburn, Ind.  “They also tend tohave higher expenses than the average mutual fund so theirinvestment choices may not be as strong.”

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Employers can offer 529 plans at no cost to themselves, but evenwhen they do offer it to employees the adoption rate is “notmassive,” Heywood says. “From an employee standpoint, there are nocompelling reasons to buy a 529 through their employer rather thanset it up to run through their own bank account.”

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If, for some reason, the money saved in a 529 plan does not getused, the owner of the account can withdraw the money, paying taxeson the growth only and a 10 percent penalty, VandeVelde says.

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Many customers ask what they should do with their child's 529plan if they receive a full scholarship. In that case, the studentis allowed to withdraw the same amount of money from their 529 planas they are receiving from their scholarship every year. There isno penalty and they can use the money as they wish.

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The rules

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Parents are allowed to invest in 529 plans in any state thatoffers them, but typically you need to reside in the same state asyour 529 plan to receive any tax benefits on your state tax return,VandeVelde says.

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“You have to be a resident of Indiana to get its tax credit,” hesays. “Ninety percent of the time people will invest in their ownstate's plan. There are some states [that don't offer] additionalbenefits. Those are the ones doing the shopping, looking intodifferent options for the best plan.”

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But just because you have a 529 plan for your child doesn't meanyou shouldn't explore the other educational savings options,Heywood says. He is a big proponent of pairing the 529 with aUniform Gift to Minors Account.

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“UGMA accounts are viewed as irrevocable gifts to the child, sothey are in the child's assets. When they reach the age ofmajority, either 18 or 21, they have the legal right to assumethose assets,” Heywood says.

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 That means your child could use that money to pay forschool, go on a trip or buy a car. The money is exempt from taxes,up to a specified value, so it is a worthwhile way to save moneyfor your dependents.

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The big advantage of the 529 is that it stays under the controlof the person who opened it up and it must be used for educationalpurposes, he says.

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