A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. It is named after section 529 of the Internal Revenue Code. The detailed behavior of 529 plans is determined by state legislation, and while most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors and exemption from state financial aid calculations, for investors who invest in 529 plans within their state of residence. Image File history File links Unbalanced_scales. ... Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes...

There are two types of 529 plans: prepaid and savings.

• Prepaid plans allow one to purchase tuition credits, at today's rates, to be used in the future. Therefore, performance is based upon tuition inflation.
• Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college-age. They also offer risk-based asset allocation options where the underlying investments maintain the same equity-to-fixed-income ratio regardless of the age of the beneficiary. Many savings plans also offer a stable value or guaranteed option designed to protect an investor's principal while providing for some investment growth, while others offer investments in certificates of deposit.

Prepaid plans may be administered by states or higher education institutions. Savings plans may only be administered by states. Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company. This article deals with U.S. mutual funds. ... A certificate of deposit or CD is, in the United States, a time deposit, a familiar financial product, commonly offered to consumers by banks, thrift institutions, and credit unions. ...

With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages. Before EGTRRA, distributions from 529 plans for qualified higher education expenses were taxed at the beneficiary's federal income tax rate. After EGTRRA, distributions from 529 plans for qualified higher education expenses are exempt from federal income tax. The 529 plan provisions of EGTRRA, originally set to expire in 2010 due to a sunset provision, were made permanent by the Pension Protection Act of 2006. The Economic Growth and Tax Relief Reconciliation Act of 2001 was a sweeping piece of tax legislation in the United States. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        An income tax is a tax levied on the financial income... In public policy, a sunset provision or sunset clause is a provision in a statute or regulation that terminates or repeals all or portions of the law after a specific date, unless further legislative action is taken to extend it. ... The Pension Protection Act of 2006 (Pub. ...

Advantages

There are four advantages to the 529 plan:

First, although contributions are not deductible to the donor, the principal grows tax-deferred and distributions for the beneficiary's college costs are exempt from tax. This latter feature was made permanent with the Pension Protection Act of 2006. In some states, contributions are deductible to the donor.

Second, the donor stays maintains control of the account. With few exceptions, the named beneficiary has no rights to the funds. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. (However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax and an additional 10% penalty tax). Compare this level of control to a custodial account under the Uniform Transfers to Minors Acts (UTMA). UTMA - Uniform Transfer to Minors Act An extension to the Uniform Gifts to Minors Act that allows items other than cash or securities to be considered gifts. ...

Third, a 529 plan can provide a very easy hands-off way to save for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager. You won't even receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals. If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state's program provided no such rollover for your beneficiary has occurred in the prior 12 months. (There is no federal limit on the frequency of these changes if you replace the account beneficiary with another qualifying family member at the same time.)

Finally, everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $300,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions.

Disadvantages

An article in Slate magazine showed the high fees that can be associated with these plans may make them less effective saving tools than more traditional funds.[1] A more recent analysis concluded that while some 529 have improved by reducing fees and expenses and offering more investment options, some 529 plans still charge exorbitant fees that effectively negate the plan's tax benefits[2]. For example, one of Louisiana's plans charged a very modest $19 over 10 years, while one of Montana's 529 plans managed by Pacific Life charged as much as 35% of the buyer's original investment over a 10 year period. Slate is an online news and culture magazine created in 1996 by former New Republic editor Michael Kinsley and owned by Microsoft (as part of MSN). ... Pacific Life is a Fortune 500 company based in Newport Beach, California. ...

While the number and types of 529 plans is growing, not all investment vehicles are available in 529 form.

Money withdrawn from a 529 plan that is not spent on eligible college expenses will be subject to income tax. Additionally the earnings portion of such a withdrawal will be subject to an additional 10% federal tax penalty.

The 529 account is counted as an asset that may affect the eligibility of financial aid (loans and grants). A potential workaround for this is for the plan owner to be someone other than the student or their parent.

See also

• Coverdell Education Savings Accounts
• Uniform Gifts to Minors Act
• Uniform Transfers To Minors Act
• List of finance topics
• List of personal finance topics

A Coverdell Education Savings Account (also known as an Education Savings Account, a Coverdell ESA, a Coverdell Account, or just an ESA and formerly known as an Education IRA), is a tax-advantaged investment account in the United States designed to encourage savings to cover future college education expenses. ... The Uniform Transfers To Minors Act (UTMA) is a uniform act drafted and recommended by the National Conference of Commissioners on Uniform State Laws in 1986, and subsequently enacted by most U.S. States, which provides a mechanism under which gifts can be made to a minor without requiring the... Topics in finance include: // Finance an overview Arbitrage Capital (economics) Capital asset pricing model Cash flow Cash flow matching Debt Default Consumer debt Debt consolidation Debt settlement Credit counseling Bankruptcy Debt diet Debt-snowball method Discounted cash flow Financial capital Funding Financial modeling Entrepreneur Entrepreneurship Fixed income analysis Gap financing... Topics in finance include: // Finance an overview Arbitrage Capital (economics) Capital asset pricing model Cash flow Cash flow matching Debt Default Consumer debt Debt consolidation Debt settlement Credit counseling Bankruptcy Debt diet Debt-snowball method Discounted cash flow Financial capital Funding Financial modeling Entrepreneur Entrepreneurship Fixed income analysis Gap financing...

External links

• "MSRB general summary of 529 college savings plans" - Municipal Securities Rulemaking Board (MSRB)
• "Section 529 of the Internal Revenue Code" - (MSRB)
• "SEC Introduction to 529 Plans" - United States Securities and Exchange Commission
• "Qualified Tuition Program (QTP)", Publication 970 (2005) - Internal Revenue Service
• "529 plans and financial aid eligibility"