Question: What is the Private College 529 Plan, and who should invest in one? What happens to the money if you don't go to one of the colleges? -N.H., Bethesda, Md.
Answer: The Private College 529 Plan is a prepaid tuition plan you can use at more than 290 private colleges, including Duke, Emory, Notre Dame, Princeton and Rice. The money you invest prepays future tuition at today's prices. So if you invested $10,000 in the plan 10 years ago, it would have bought about one-fourth of a year's tuition at Notre Dame--now worth nearly $14,500, says Bob Cole, of the Private College 529 Plan. The gains are tax-free, and the prepaid tuition can be redeemed for up to 30 years. Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania let residents deduct plan contributions on state tax returns.
If your child doesn't go to a school on the list, you can use the money to pay other colleges directly without owing taxes or penalties—but the value is limited to your contribution plus net investment returns of no more than 2% per year. You can also switch the account to another beneficiary within the family.
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