Moneyzine
Contents
/Personal Finance/529 Plans

529 Plans

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 25th, 2023
Advertiser Disclosure

Definition

Also referred to as prepaid tuition and college savings plans, 529 plans are named after the section of the federal tax code that created these investments. The 529 is a tax-advantaged account that allows investors to save money for the higher education costs of the plan's beneficiary.

Explanation

Like Coverdell Education Savings Accounts, 529 plans provide tax benefits to individuals and families that are saving for college expenses. Originally, 529 plans were administered by state agencies and funding was aimed at public institutions of higher education. Today, 529 plans are administered and offered through private colleges and universities too.

There are two basic types of 529 plans:

  • Prepaid Tuition: allows the investor to purchase tuition credits at today's rates. With a prepaid plan, the plan's administrator assumes the risk the fund's growth will match the rising cost of tuition.

  • College Savings: investors contribute to the plan based on minimum and maximum installments, which are set by each plan. With a college savings plan, the investor assumes the risk the fund's growth will match the rising cost of tuition. Contributions to some plans can exceed $300,000 for a single beneficiary.

Money placed into the account can be used to pay for tuition, room and board, books, equipment, supplies and fees at an accredited vocational school, college or university. There are many different 529 plans offered, so it's important to understand the portability of the plan, fees, as well as their risks.

The contributions to a 529 plan are not tax deductible. The account grows on a tax-deferred basis and distributions to qualified beneficiaries are tax-free. The investor always remains in control of the account; however, non-qualified distributions are subject to income tax as well as a 10% tax penalty.

Plan beneficiaries encompass a long list of family members, including spouses; sons; daughters; adopted, step, and foster children; brothers and sisters; stepbrothers and stepsisters; brothers-in-law and sisters-in-law; fathers and mothers; aunts and uncles; as well as first cousins.

Under the federal gift tax laws, contributions to 529 plans are classified as gifts and excess contributions will count against the one-time gift exemption.

Related Terms

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    March 26th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    March 27th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine 2024. All Rights Reserved.