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I recently got to know about 529 college savings account and have a couple of questions about it.

I am a resident of New Jersey and my sister is a resident of Minnesota where she goes to school . I actually pay for her tuition and other expenses for the year and was wondering if I could open a 529 college savings account for her . The total amount i expect to pay for her in 2007 is about 7k . Out of this I have already paid 3k.(Can I make a contribution to the 529 college savings account for the 3 K I have already paid this year)

are contributions also tax free in a 529 or is it the income on contribution only that is tax free

I also plan to claim her as a dependent on my tax return
When I claim her as a Dependant, how much tax break do I get ? What are the criteria of claiming her as a Dependant. I was told she can not make above a specific amount for that to happen. She currently makes about 5 K a year. Is that too much for me to claim her as a Dependant ?

I myself plan to go back to school for an MBA in fall 2008 and therefore want to start collecting on some tax free money which will prove to be a great resource of money when I go back to school.

What is the best way to save a 529 or some other account. I know the earnings are tax free on a 529. Is there any account where I could put away money for school before paying taxes ? It would be nice if i could find something where both my contributions and income on them could be tax free !

Thanks All
-mobajwa

You do not get a federal tax income deduction for making a 529 contribution. A few states will give you a state tax deduction but New Jersey is not one of these states. Hence, the idea of funding a 529 to immediately be used for somebody already in college is a nonstarter. 529s make the growth on your contribution non-taxable when used for college costs but with timeframes this short, unless it's a huge sum of money involved, it may not be worth the effort. You may be able to get higher tax equivalent yields than CDs/money markets available in 529 plans net plan costs. Hard to say unless every 529 plan is evaluated for the CD & MMF yields.

As for claiming as dependent, all I see in the tax code is < 19 or < 24 in school fulltime. She will still have to file her own taxes and mark the appropriate checkbox so she doesn't claim herself as a dependent also. Edit: < 24 + fulltime school + you pay for 50%+ of her expenses.