Prepaid plans allow contributors to lock in prices at Virginia public colleges. The latest option is a state-run savings plan. Forty-eight states have come up with savings plans in the past two to three years. Both the prepaid and savings plans are 529s, referring to an Internal Revenue code. The reason that's important is the tax advantage.
Contributions are tax deferred until the money is withdrawn.
Even better, the earnings are taxed at the beneficiary's tax level, meaning Mom, Dad, Grandma or Grandpa can open an account and contribute to it over the years. But the money is taxed at the student's rate. With a summer waitress or yard job and maybe a part-time job during the school year, the income tax rate is likely to be at the lowest level. Use the money for any other purposes, however, and it will be taxed at the account holder's income tax rate. It also will incur a 10 percent penalty.