A 529 plan, also known as a qualified tuition plan, is a means of saving for higher education for a designated beneficiary. Named after section 529 of the Internal Revenue Code, it enables a sponsor to contribute money to a college savings account whose interest accumulates tax-free.
Although the contributions to a 529 plan are not tax deductible, the investment earnings are not subject to federal tax and most state taxes. Contributions are limited to the amount a beneficiary needs for educational expenses. The beneficiary can use the funds in a 529 account for qualified expenses, such as tuition, books, supplies, room and board, computer technology, computer-related equipment and Internet access. If the original beneficiary does not go to college, the account holder can change the beneficiary to another member of the family. The purchaser of the account, instead of the beneficiary, controls the funds until they are withdrawn.
There are two types of 529 plans. With a pre-paid tuition plan, the cost of tuition is locked into current prices. With a savings plan, the sponsor accumulates future college funds through contributions and investments. All 529 plans conform to federal guidelines, but specifics in the plans vary from state to state. Because 529 plans have no residency restrictions, sponsors can invest in plans in any state.