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what are the tax implications of investing in a 529 plan?
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withdrawals from a 529 plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses. any other withdrawals are subject to taxes plus a 10% penalty, with exceptions for certain circumstances, such as death or disability. the money you contribute to a 529 plan isn't tax deductible for federal income tax purposes. however, more than 30 states provide tax deductions or credits of varying amounts for contributions to a 529 plan. in general, you'll need to invest in your home state's plan if you want a state tax deduction or credit. if you're willing to forgo a tax break, some states will allow you to invest in their plans as a nonresident.
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