Saving for College with a 529 Plan: Frequently Asked Questions

Why and how to start saving for college with a 529 plan.

What Is It?

What is a 529 plan?

It's an investment plan operated by a state and designed to help families save for future college costs. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant (Section 529 of the Internal Revenue Code).

It's up to each state to decide whether it will offer a 529 plan (or possibly more than one), and what it will look like. Every state now has at least one 529 plan available. 529 plans are usually categorized as either prepaid or savings, although some have elements of both.

Why should I invest in a 529 plan when I can't be sure that my child will attend a public university in my state?

There's a misconception that 529 plans are only geared to families that send their children to a state school. That's just not true. There are two general types of 529 plans: prepaid programs and savings programs. The states offering prepaid tuition contracts covering in-state tuition will allow you to transfer the value of your contract to private and out-of-state schools (although you may not get full value depending on the particular state). If you decide to use a 529 savings program, the full value of your account can be used at any accredited college or university in the country (along with some foreign institutions).

Recent tax law changes now permit higher education institutions to offer their own 529 prepaid programs. These will allow you to target your tuition prepayment to the sponsoring institution (or group of institutions). While none of these programs have begun yet, we could see one fairly soon.

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