What is a 529 Plan?

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Currently offered by all 50 states and the District of Columbia, 529 plans get their name from Section 529 of the Internal Revenue Code, which established federal tax advantages for qualified college savings plans. These plans help you plan and save for qualified higher education expenses at eligible educational institutions. There are two basic 529 plan options – prepaid tuition programs, which in most cases allow families to prepay for future in–state public college tuition and mandatory expenses and savings programs. The tax benefits of 529 plans are similar to those for 401K retirement savings, but upon withdrawal earnings are tax free when used for qualified higher education expenses. In addition, some states like Virginia, offer income tax benefits for those who contribute to that state’s 529 plan.

The individual who opens the 529 account, not the actual beneficiary, retains full control of their 529 money. Funds in 529 accounts can be rolled over to another state’s plan – and can be withdrawn at any time for any purpose. Withdrawals not made for qualified higher education expenses carry a 10% federal penalty on earnings unless the child receives a full scholarship, becomes disabled, or passes away. Unlike other college savings programs, 529 plans do not have income restrictions. The maximum savings amount is substantial – in Virginia, for example, currently up to $500,000 can be deposited for each student.

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