COLLEGE SAVINGS 101

What is a 529 plan?

Updated: 2018-01-15

529 plans are versatile savings accounts that offer federal, and sometimes state, tax benefits, while minimizing impact on financial aid. They are operated by a state or educational institution, and are designed to help families set aside funds for future college and K-12 education costs.

529 plan history

Section 529 was added to the Internal Revenue Code by a 1996 piece of legislation authorizing "qualified tuition programs", giving state programs both their popular name and tax-deferred status. Funds invested in these programs are not taxed federally when used for "qualified higher education expenses", the definition of which has been expanded in 2015 to include computers and in 2017 to include up to $10,000 in K-12 tuition.

State plans are OK for out of state colleges

529 Plans can be used to meet costs of qualified colleges nationwide. In most plans, your choice of school is not affected by the state your 529 savings plan is from. You can be a CA resident, invest in a VT plan and send your student to college in NC. Check to see if your institution is eligible under 529 rules.

Which states offer 529 plans?

Nearly every state now has at least one 529 plan available. It's up to each state to decide whether it will offer a 529 plan (possibly more than one) and what it will look like, meaning 529 plans can differ from state to state. You should research the features and benefits of your plan before you invest, research state 529 plans and even compare between plans.

Tax Benefits

As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant. See the top 7 benefits of 529 plans.

Some states (but not all) offer tax incentives to investors as well. Research your state's tax treatment.

Types of 529 plans

529 plans are usually categorized as either prepaid or savings plans.

Savings Plans work much like a 401K or IRA by investing your contributions in mutual funds or similar investments. The plan will offer you several investment options from which to choose. Your account will go up or down in value based on the performance of the particular option you select. You can see how each 529 plan's investment options are performing by reviewing our quarterly 529 plan performance rankings.

Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges.

Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the Private College 529 Plan is the only institution-sponsored 529 plan thus far).

Enrolling in a 529 plan

There are two ways to invest in a 529 plan.

  1. Directly with the 529 Plan manager. See a list of 529 plans.
  2. Through a financial advisor. Find an advisor in our Pro Directory.

Related: Top 7 Benefits of 529 Plans

 

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