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What is a 529 Plan?

Updated on December 22, 2009

A 529 plan is a savings plan for educational expenses administered by a state or educational institution in order to assist families in saving for their children’s college education. The Internal Revenue Code established these types of saving plans in Section 529 in 1996. Most plans offer tax benefits to the participants as well.

529 plans differ from state to state. Each state is responsible for deciding whether or not it will offer a 529 plan (or multiple plans) and what kinds of expenses it will cover and what the requirements are for participation.


Every state now offers at least one 529 plan. However, in most cases, you can invest in plans administered by states in which you do not live, and send your child to a college not in the state administering the plans. So be sure to compare plans to make sure you invest in the one that fits you best. It is important to note that some institutions are ineligible for some 529 plans, so be sure to check your institution’s eligibility.



Types of 529 plans

There are prepaid plans and savings plans available under the general heading of 529 plans.

In a Prepaid Plan, the participant has the option of pre-paying part or even all of the costs of attending an in-state public institution of higher education. If you change your mind about the type of college you choose at a later date, these funds can be transferred for use toward expenses at private and out of state colleges, though the funds you’ve prepaid may not cover all expenses at these institutions. Prepaid plans for private colleges fall under the heading of the Independent 529 Plan. In addition to the state-run prepaid 529 plan, higher education institutions have the option of offering their own 529 prepaid plans. Currently, the Independent 529 plan is the only one sponsored by a college or university.

In a Savings Plan, the participant invests in mutual funds or other investments in order to earn interest off the principal. The amount of savings the participant accrues depends directly on the performance of the particular investment option the participant chooses. Universities are not allowed to offer 529 savings plans.

In both these types of 529 plan, the donor retains complete control over the account. This means that you decide when funds are withdrawn and what they are used for, instead of control passing to your student.

Enrolling

You can enroll in a 529 plan by meeting with a 529 Plan Manager or through a financial advisor.

Image Credit: AMagill, Flickr

Comments

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  • Pamela99 profile image

    Pamela Oglesby 

    8 years ago from Sunny Florida

    It would be wonderful if more parents started this process when their children are young. This is an excellent hub.

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