A 529 plan, also known as a Qualified Tuition Program, is a tax-advantaged savings account designed to encourage saving for future higher education expenses of a designated beneficiary. The plans are named after section 529 of the Internal Revenue Code. Here are some key features of a 529 plan:
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Tax advantages: Contributions to 529 college savings plans are made with after-tax dollars, and as long as the money stays in the account, no income taxes will be due on earnings. When you take money out to pay for qualified education expenses, those withdrawals may be federal income tax-free—and, in many cases, free of state tax too.
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Flexibility: The money in a 529 plan can be used for a wide range of college expenses at accredited schools nationwide in addition to tuition expenses for K-12, certain apprenticeship costs, and student loan repayments.
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Control: Unlike a custodial account, with a 529 plan, the account owner maintains ownership of the account until the money is withdrawn.
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Low minimum start-up and contribution requirements: 529 plans generally have very low minimum start-up and contribution requirements.
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Two types of 529 plans: Education savings plans and prepaid tuition plans. Most education savings plans are available to everyone, but a few have residency requirements for the saver and/or beneficiary. Prepaid tuition plans typically have residency requirements.
Anyone can open a 529 account, but they are typically established by parents or grandparents on behalf of a child or grandchild, who is the accounts beneficiary. In some states, the person who funds the account may be eligible for a state tax deduction for their contributions. Withdrawals from a 529 savings plan can be used for both college and K–12 qualified expenses. Qualified expenses include tuition, fees, room and board, and related costs. The SECURE Act of 2019 expanded tax-free 529 plan withdrawals to include registered apprenticeship program expenses and up to $10,000 in student loan debt repayment for both account beneficiaries and their siblings.
