The East Lansing woman invested last year in Michigan's state-run college savings plan and chose an option that guarantees her a return of at least 3 percent a year on contributions deducted from her paycheck. A lot of them are saying, 'This is a long-term account. My kid is young. There's time to recover and grow,''' said Joseph Hurley, a certified public accountant from Pittsford, N.Y. and author of a book on Section 529 plans. The plans, offered by nearly every state, allow parents and grandparents to invest in mutual funds that grow tax-free until the money is withdrawn, and then it is taxed at the student's rate.
Some states let investors deduct all or part of the contributions from state taxes.
Besides tuition, Section 529 money can be used for room and board and other college costs. The money can be used at any school in the country. Contributors qualify for state income tax deductions. Although some states only offer Section 529 plans to residents or those who work in the state, others have opened their plans to investors nationwide. Last November, Rhode Island set off a boom when it relaunched its college savings program and began marketing it nationally.