DEFINITION of the 529 savings plan
A tax-efficient method of saving for future college expenses, authorized by section 529 of the Internal Revenue Code. Legally known as “qualified tuition plans”, 529 Savings plans are sponsored by states, state agencies or educational institutions and can be used to cover tuition, room, pension, books, computers and other expenses of a beneficiary. Money deposited into the account can be invested in equity or fixed income mutual funds, as well as money market funds, exchange-traded funds (ETFs) and a capital-protected banking product. In most cases, the income is not subject to federal or state tax, provided that the money is used only for eligible college expenses. The plans are open to beneficiary adults and children.
BREAKDOWN 529 Savings plan
Each US state has its own 529 savings plans, filled with a unique set of features. People living in any state can open a 529 plan, but the plan does not have to be in the state of residence of the account holder or designated beneficiary.
There are two types of 529 plans: prepaid tuition plans and university savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan, but a group of private universities participate in prepaid tuition plans. With Prepaid tuition plans, the account holder purchases credits from participating colleges and universities, covering future tuition fees, but locking them in at current prices. Generally offered by state public academic institutions, prepaid tuition plans cannot generally be used for future room and board and other incidental expenses. The federal government does not guarantee prepaid plans and although only some state governments guarantee the money paid into the plans they sponsor, which account holders can lose if the underlying investments decline in value. College education savings plans let account holders open an investment account to save for the beneficiary’s future qualified higher education, which includes room and board, as well as tuition fees. College savings plan accounts generally apply to any university, including non-US higher education institutions.
It is important to recognize that the fees associated with 529 plans can reduce returns and that the fees may vary depending on whether the type of 529 plan in question is a university savings plan or a prepaid education plan. Therefore, account holders are responsible for studying the fee structure before implementing any of the plans, in order to fully understand the terms of each investment option. Both plans may charge application fees and ongoing administration fees.