What is a 529 Plan?

A 529 plan, also known as a Qualified Tuition Program, is a college savings plan that offers a myriad of financial benefits and tax incentives. Nearly every state has at least one 529 plan and 529 plans can also be used to save for K-12 tuition and other education-related expenses as well.

529 Plans were named after section 529 of the IRS Code; which grants a tax-free status to "qualified tuition programs." Contributions made to a 529 plan accumulate on a tax-differed basis and distributions are not taxed federally when put toward qualified higher education-related expenses.

This includes tuition, fees, books, supplies, and "equipment required for enrollment/attendance at an institution of higher education." In 2015, the definition was expended to include computers; and in 2017 it was expended again to include up to $10,000 annually in K-12 tuition.

Some plans can also be used to pay for graduate school.

You can invest in any state 529 plan, regardless of whether or not you live there; and in most cases your choice of college is not affected by the state that sponsored your 529 plan.

For instance, you could be a Pennsylvania resident, invent in a 529 plan in Utah, and send your kids to college in California.

There are two type of 529 plans: Prepaid tuition plans and College savings plans. Prepaid tuition plans allow you to lock-in current tuition prices at in-state public colleges & universities. These plans are guaranteed by the states that sponsor them; whereas College savings plans offer better flexibility but no guarantee.

Companies such as CollegeBacker.com are set up to help you navigate the 529 sign-up process. Plus they make it easy for family and friends to contribute.

Sources:

FinAid.org "Section 529 Plans"

SavingForCollege.com "What is a 529 Plan?