Named after Section 529 of the Internal Revenue Code, 529 plans are tax-advantaged investment vehicles specifically designed for education savings. Understanding how these plans work can help you maximize their benefits for your family.

Types of 529 Plans

• 529 College Savings Plans: Investment accounts where funds grow tax-free when used for qualified education expenses. These are the most common type of 529 plan.
• 529 Prepaid Tuition Plans: Allow you to purchase future tuition credits at today's prices, protecting against tuition inflation. Less common and typically limited to in-state public institutions.

Key Benefits of 529 Plans

• Tax-Free Growth: Earnings grow tax-free when used for qualified education expenses, potentially saving thousands in taxes over time.
• State Tax Benefits: Many states offer income tax deductions or credits for 529 plan contributions to their state-sponsored plan.
• Flexibility: Funds can be used at any accredited college or university nationwide and many international institutions.
• Account Control: The account owner (typically the parent or grandparent) maintains control of the funds, not the beneficiary.
• Gift Tax Benefits: Special provision allows for five years of gifts to be made at once (up to $75,000 per beneficiary, or $150,000 for married couples) without gift tax consequences.
• Low Impact on Financial Aid: 529 plans owned by parents have relatively minimal impact on financial aid eligibility compared to other savings methods.

Qualified Education Expenses

529 plan funds can be withdrawn tax-free for:

• Tuition and fees at eligible educational institutions
• Books, supplies, and equipment required for enrollment
• Room and board (for students enrolled at least half-time)
• Computer equipment, software, and internet access
• K-12 tuition expenses (up to $10,000 per year)
• Registered apprenticeship program expenses
• Student loan repayment (lifetime limit of $10,000 per beneficiary)

Investment Strategies for 529 Plans

• Age-Based Portfolios: Automatically shift from aggressive to conservative investments as the beneficiary approaches college age. Simple "set-it-and-forget-it" option.
• Static Portfolios: Maintain a consistent asset allocation that you select and adjust manually. Provides more control but requires more active management.
• Individual Funds: Some plans allow you to create a custom portfolio from individual funds. Best for investors comfortable with managing their own asset allocations.

Common Questions About 529 Plans