What is a 529 Plan?
Tip It!I’ve written in the past about the best 529 plans, but I’ve never really written an article explaining exactly what these plans are all about. In short, 529 plans are tax-advantaged savings plans that are designed to encourage people to save for future college costs. But there’s more to it than that…
In general terms, 529 plans com in two flavors: pre-paid tuition plans, and college savings plans. I’ve put together a thumbnail sketch of each type, below.
529 Pre-Paid Tuition Plans
Pre-paid tuition plans allow people to pre-pay for all or part of a future college education at today’s prices. Some of these plans allow you to buy “units” of tuition (corresponding either to a set number of credit hours, or a percentage of the tuition bill), whereas others allow you to purchase contracts for one to five years of tuition.
The advantage of these plans are that they are guaranteed to cover the future cost of education. A major disadvantage is that they are targeted toward public colleges or universities, and are typically limited to state residents. Beyond this, pre-paid tuition plans cover only tuition and mandatory fees, though some plans offer a room and board option, or let you use excess tuition credits for other expenses.
529 College Savings Plans
College savings plans allow an account holder to save and invest for future college expenses on behalf of a beneficiary. The account holder can choose amongst a number of investment options including stock and bond mutual funds, money market funds, and age-based portfolios.
These plans are similar to Roth IRAs in that there are no federal income tax benefits, but withdrawals are tax free as long as you use them to cover qualified expenses. Qualified expenses include tuition, fees, room and board, textbooks, and computers (if required).
The contribution limits on these plans are very high, generally in excess of $200k total, and they are also more flexible than pre-paid plans in that you’re not locked into a particular school (or even state). The primary disadvantage is that there is no guarantee that your investments will cover the future cost of a college education.
Published on April 24th, 2009 - 9 Comments
Filed under: Education, Saving & Investing
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» The Best 529 Plans – 2009 Edition» Sprint SERO Users, Check Your Bill
» $10 AT&T DSL for New Subscribers
» Retirement Savings Options, Part I
» The Very Best 529 Plans?
» Blockbuster Price Change – We’re Still on the Older, Better Plan
» 4% Mortgages Just Around the Corner?
» The Best 529 Plans, Revisited
Was this article useful? Please sign up to receive our content via e-mail:
9 Responses to “What is a 529 Plan?”
Leave a Reply
Top Cards by Category
Earn $200 Bonus Cash Back after you make $500 in purchases in your first 3 months. 5% Cash Back on up to $1,500 spent in bonus categories each quarter.
Earn up to 20,000 bonus miles with your first purchase 10,000 of which count as Medallion(R) Qualification Miles. Earn up to 5,000 bonus miles when you add two additional cards to your account with initial application.
Earn 30,000 bonus miles toward Award Travel when you spend $500 on the Card in the first three months from account opening. Receive double miles on Delta purchases.
No Balance Transfer Fee!* 0% Intro APR for up to 15 months on purchases and balance transfers. This card offers Blueprint, free and customizable account features that help you avoid unnecessary interest and pay your balances down faster.
Enjoy no balance transfer fee for a limited time. 0% introductory rate on Balance Transfers and Purchases. Earn up to 5% Cashback Bonus in categories that change like gas, restaurants, department stores and more. Limitations apply*
Enjoy no balance transfer fee for a limited time. 0% introductory rate on Balance Transfers and Purchases. Earn up to 5% Cashback Bonus in categories that change like gas, restaurants, department stores and more. Limitations apply*
Enjoy amenities for you and your business, like: complimentary airport club access, including American Airlines Admirals Club(R) lounges.
5% Cashback Bonus in categories that change like gas, restaurants, department stores and more. Limitations apply*. Up to 1% unlimited Cashback Bonus on everything else. No annual fee
Earn 3X points on airfare, 2X points on gas and groceries, and 1X points on everything else.
Reports to 3 major credit bureaus monthly and acceptance at millions of locations worldwide, including website purchases and reservations.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math
- Dish Network Customer Service SUCKS
- $8,000 Homebuyer Tax Credit
- Pay Off Mortgage Early or Invest?
- How to Claim the First-Time Homebuyer Tax Credit
- Reduced Credit Limits? Share Your Experience
- $15,000 Homebuyer Tax Credit
- Ethanol Blended Gas = Lower Mileage?
- Termite Control: Sentricon vs. Termidor
- How Much Should You Pay a Babysitter?
- Federal Income Tax Rates Went Down but Your Federal Tax Withholding Increased. Here's Why...
- Would the "Fair Tax" Gut the Economy?
How to save money on insurance
- The Best Values in Colleges - 2012 Edition
- Five Myths About Renter's Insurance
- Own Your Investments, Rent Your Fun
- Citibank to Issue Credit Cards in China
- Heartstrings and Pursestrings
- Saving Money at the Grocery Store: Store Brand Pricing on the Rise
- Missing Tax Paperwork?
- Is Your Investment Allocation Right?
- Chase Freedom Experimenting With Quarterly Rewards Auto-Enrollment
- Income-Based Repayment Plans for Student Loans
April 24th, 2009 at 8:34 am
529s are a great tool. I’m still a few years away from having kids, but I’m having the grandparents set of 529s for them whenever they are born. The wifey and I will make contributions as well, and that way we won’t have to stress about paying for school.
April 24th, 2009 at 9:20 am
Why do 529 plans restrict my investment choices. When opening an IRA I can choose any fund to invest..why not the same for 529s?
April 24th, 2009 at 10:50 am
I wish the government could create a simple plan like the IRA where you can open a plan similar to a 529 in any brokerage and trade any security.
The fact that states offer it and its management is outsourced to another company all lead to fees which could be retained by the investor.
April 24th, 2009 at 3:42 pm
Be wary of the word “guarantee”… Alabama (my state) is currently in a tizzy over this very issue. The state PACT (prepaid affordable college tuition) plan was basically the same thing (or may have actually been a 529, not sure) and the people who signed on from the beginning were “guaranteed” that their tuition would be 100% covered.
Fast-forward 20 years, with skyrocketing tuition rates and a plan manager who ran the fund a bit too loosely, and you have a budget crisis akin to the Social Security mess — people who paid in may not get back what they were promised.
One remedy that has been proposed is to cap tuition rates at state schools for those who have invested. But that shifts the burden onto everyone else who found their own way to pay for their kids’ college, because the schools will just raise their rates even higher. I haven’t heard of any other proposals so far.
Either way, there’s going to be a lot of ticked off people in this state in the near future.
April 24th, 2009 at 6:19 pm
One of the biggest mistakes I see families making is funding a 529 plan while holding non-mortgage debt, like credit card balances. This approach doesn’t make any financial sense. It’s much more effective to focus on paying off most types of debt first before socking away for a child’s future education. There are just too many frugal options for getting kids through college – including low interest government loans, grants, scholarships, financial aid programs like work-study, and budget community college.
April 24th, 2009 at 6:30 pm
Don’t fund the 529! Not until you’ve funded your IRA. You have more options with the money in your IRA later. You may even want to pay more into your mortgage before funding the 529. You will not loose money paying off a debt and will save money on interest. Otherwise the debt will be waiting for you forever.
You child may get financial aide, scholarships, or decide not to go to college. There’s a lot of risk in funding the 529 when you try to withdrawl from it.
April 25th, 2009 at 7:09 am
Nice write up.
I would be careful not to overfund– especially in the child’s name or your own. It may have a negative impact financial aid apps . . . many recommend putting it in grandma’s name.
April 28th, 2009 at 2:58 pm
I know I am a couple posts late but I had a question. What if I am going back to school for a MBA? Can I save money for myself in a 529?
Thanks!
April 28th, 2009 at 3:38 pm
Yes, anyone (including adults) can be listed as the beneficiary. Even yourself.