What is a 529 Savings Plan?

A 529 college savings plan is somewhat similar to the more familiar IRA retirement savings plan. It is a tax advantage plan that allows for savings towards college tuition and expenses. The plan can be set up for your children, grandchildren, yourself or other beneficiary. Withdrawals from a 529 savings plan are tax free at the Federal level, and in some states, for eligible college expenses. The name itself came from section 529 of the Internal Revenue Code.

There are two basic types of 529 plans. You can choose from a 529 savings plan or a 529 prepaid plan. 529 savings plans are administered by the State. The plan earnings are based on market performance. Just like an IRA plan, you can choose higher risk with potential higher yield plans or more conservative slower growth plans depending on your needs and investment strategy. Many of the plans will offer a guarantee option to protect the initial investment principle.

529 prepaid plans are available in 13 states. The prepaid plan allows for the purchase of tuition credits at the cost of the time of purchase that would then be used to pay for the beneficiaries tuition at the time of enrollment. This type of plan may be administered by the state or the college-institution purchased for. The benefit for this is based on the expected increase in tuition costs over the years.

There are currently 48 states plus the District of Columbia that offer 529 savings plans. Each state has different rules and investment options. With a state 529 savings plan there are more potential benefits over the 529 prepaid plan. These benefits include possible state income tax deductions, scholarship and grants and the exemption of the funds from state financial aid calculations.

Funds in 529 savings plan grow tax free at both State and Federal levels. Whether or not the funds withdrawn are taxable on the State level depends on the State plan. Funds from the 529 savings plan can generally be used for tuition, room and board, fees, books and other supplies. Beneficiaries may be changed during the course of a plan and more than one plan can be set up for one beneficiary.

As with any type of investment, do your research well. Check out the available options of the plan you choose. Plans can also be purchased directly through some states bypassing the usual sales commission, but then you are more on your own in understanding all the rules and regulations.