South Carolina's Future Scholar plan is a good option for college savings, offering tax benefits for state residents whether they are saving for future expenses or paying tuition bills right now.

Future Scholar is South Carolina's 529 plan. A 529 plan (named for section 529 of the federal tax code) is a federally sanctioned college savings plan with state and federal tax benefits.

And if you were lucky enough to have a child born in South Carolina on May 29 — “529 Day” — then you're eligible for a free one-time grant of $529 to get started with saving for that child's college education in a Future Scholar account.

The state treasurer announced the incentive as part of 529 Day. I'll provide details about the free Palmetto Baby grant money, which the treasurer's office says is being privately funded.

But first, some basics about 529 plans and Future Scholar.

Think of a 529 plan like a retirement plan, but for college.

Like a Roth Individual Retirement Account, contributions to Future Scholar can be invested in a variety of ways such as stock funds, bond funds and a money market account, and there are no state or federal taxes due on investment gains when the money is withdrawn, so long as it's used for the intended purpose. So if you put some money in a Future Scholar fund when junior is a baby and the fund's worth three times as much when he goes to college, those gains are not taxed.

In a 529 plan, the intended purpose is paying for the named beneficiary's education expenses. Nonqualified withdrawals can trigger a 10 percent penalty and taxes on earnings, just like if you withdraw retirement funds too early and trigger penalties.

Unlike an IRA, South Carolina residents with a Future Scholar account can claim a state tax deduction for the amount they put in. For most people, that means getting 7 percent of the money back, and there's no waiting period before you can use the contributed funds.

That's a very important feature of South Carolina's 529 plan. People can put money in, take it right back out and still get the tax deduction. That means people with kids in college right now can use Future Scholar to get some tax savings by contributing funds to a Future Scholar account before using those funds to pay for tuition or even room and board.

For long-term savers, that tax deduction lets you boost the amount you can afford to save. For example, someone who decides to contribute $100 a month ($1,200 a year) would save $84 in S.C. income tax, nearly enough to cover one monthly contribution. Think of it like the matching funds that some companies offer for 401(k) contributions.

The Future Scholar 529 plan is not a prepaid tuition plan. States, including South Carolina, used to offer prepaid tuition plans but shut them down to new investors years ago after finding that investments could not keep pace with rising college costs. Future Scholar is an account that you own and choose how to invest.

Some key points

The funds are controlled by the owner of the fund, not the beneficiary. The account owner is typically a parent or grandparent.

Funds can be used for higher education expense at accredited institutions in any state.

Eligible expenses include tuition, fees, room, board, books, supplies and equipment.

If funds aren't needed for the original beneficiary of the account, a different beneficiary can be named.

If the intended beneficiary receives scholarship money, an equal amount can be withdrawn from the 529 plan without the 10 percent penalty, but the withdrawal would be taxed.

Funds in a 529 plan are counted as parental assets in federal financial aid calculations, which is more favorable than having funds counted as the college-going child's assets. That means just 5.64 percent of the 529 plan balance would be counted in financial aid calculations, and qualified withdrawals aren't counted as income.

How to invest

You can set up a Future Scholar account online, download enrollment forms or call 888-244-5674. You could have a financial adviser set up an account, but don't do that. There are significant fees involved with going through an adviser, plus higher ongoing fund expenses.

There are no fees for setting up a “direct” account yourself other than the small management fees associated with the different funds. Management fees, typically a fraction of 1 percent of the value of your holdings, are taken from the fund balances.

Future Scholar direct offers 20 investment portfolios, or funds, ranging from all-stock and all-bond funds to portfolios that offer different mixes of stocks, bonds and cash. That's a lot of choices, but it's not as complicated as it sounds.

College savers have the option of choosing a fund designed to put the decisionmaking process on auto-pilot. The portfolio adjusts the blend of stocks, bonds and cash based on the age of the child the fund is meant for, making the investments more conservative as college approaches. Savers can further specify if they want an aggressive, moderate or conservative age-based portfolio.

For those who want to take a more hands-on approach, there are 17 remaining choices. All funds carry some risk, and only the low-yielding Bank Deposit fund is federally insured against losses.

Money can be moved between funds just once a year. Making regular monthly contributions, which you can set up to take place automatically, reduces the risk of investing at an inopportune time.

About grant money

All babies born in South Carolina on May 29 — that's 12 a.m. to 11:59 p.m. — are eligible for a $529 contribution to their Future Scholar account.

To get that money, you'll need to open a Future Scholar account with that child named as the beneficiary by Aug. 30 and submit the grant-related forms to the treasurer's office by that date. There's some paperwork involved, but this is free money, folks. There's no minimum contribution required to open an account.

Questions about the grant? Call 803-737-6880 or email palmettobaby@sto.sc.gov.

Reach David Slade at 937-5552 or Twitter @DSladeNews.