What are 529 Plans?
529 plans, named after the section of the tax code that governs them, are education savings plans that help families save for college. Contributions to 529 plans grow tax-free, and withdrawals for higher education expenses are exempt from federal income taxes.
There are two types of 529 plans: Prepaid tuition plans and college savings plans. Every state offers at least one of these:
- A prepaid tuition plan allows people to create an account at eligible public and private colleges and universities that locks in the tuition costs at today’s prices. For example, if you invest in four years’ worth of tuition today, this amount will always be worth four years of tuition, even in a few years when tuition rates may be higher.
- A college savings plan allows people to contribute to an account for higher education expenses, including tuition, room and board, books and fees. The contributions grow federally tax-free in the investment account. The rate of return provided by college savings plans depends on the performance of the underlying investments. Therefore, college savings accounts carry investment risk, meaning that market conditions will determine whether the value of the account increases or decreases. Most states offer more than one portfolio option, with varying levels of risk.
Important Tips
- Begin saving for college as early as you can.
- Educate yourself—compare 529 plans so that you can find the best one to fit your needs. Don’t hesitate to ask questions.
- Be aware of state tax breaks as well as fees and expenses.
- Ask about commission and sale costs when consulting with a financial advisor.
- Verify that the advisor does not have a relationship with a specific plan the advisor is recommending.
- Always double check financial advice by doing your own research.
Do 529 plans vary from state to state?
Yes, each state offers plans with different investment options, restrictions and fees. You may invest in a 529 plan from any state. You are not restricted to the plan sponsored by your home state. Some states offer tax incentives for their residents. To check specific tax advantages and other in-state plan incentives, visit the College Savings Plan Network.
How are college savings plans sold to investors?
There are two ways college savings plans are sold to investors:
- Through a financial advisor, brokerage firm, or bank.
- And directly from the state-sponsored plan.
Ask if the advisor has a relationship with the plan the advisor is recommending
Checklist for Selecting a 529 Plan
Use these questions to compare different 529 plans.
What You Need to Know About 529 College Savings Plans
Saving for a college education is a long-term investment that should begin as early as possible. Federal and state lawmakers have set up qualified tuition programs, known as 529 plans, to make it easier to plan for higher education expenses. These programs offer tax incentives to assist families in financing the future education of their children and grandchildren. There is no one savings plan that suits everyone’s needs so it is essential to know your options before you invest.
