Function

• The purpose of a 529 plan is to provide a tax-advantaged vehicle for college savings. With this type of plan you contribute money on an after-tax basis and then the money is invested in securities like stocks and bonds. The money that is earned from investment returns is not taxed. The child can then use the money on qualified higher education expenses once they reach college age.
  
  

Contributions

• You can contribute to your own child's education, or if you are a grandparent, you could also contribute to your grandchild's education. In fact, anyone can contribute to the account regardless of their relationship to the child who will be attending college. This provides flexibility that many other savings vehicles do not. It also allows more money to be set aside for college as more people can work together towards the goal.
  
  

Contribution Limits

• The contribution limits on a 529 plan are very high. The contribution limits vary from state to state, but they can be as high as $310,000. The lowest contribution limit for the account is $230,000. This allows anyone to contribute any amount they want as long as the account has not reached the state limit.
  
  

Compared to Coverdell ESA

• Another similar option for college savings is the Coverdell ESA. Anyone can contribute regardless of relationship. The annual contribution limit for this type of account is only $2,000 which means that if all contributors are not on the same page, the limit could be passed easily. A contributor may even get their contribution sent back to them if the contribution limit as been passed.
  
  

Gift Tax

• When making contributions to a 529 plan, you also have to be aware of the potential implications of gift taxes. When you make a contribution to this type of account, it is counted as a gift. If you give more than the annual exemption for gifts to individuals, you may have to pay taxes on the amount. If you are married, you can double the annual gift tax limits.