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What Is a 529 Plan: Creating a College Fund for a Child

There are a lot of ways to save for college, but 529 plans are particularly popular. You can use this plan for creating a college fund for your child while saving money in the process.

Saving for college with a 529 plan. Piggy bank with graduation cap. Stacks of coins.

What is a 529 plan? If you’re saving for college, it’s an essential part of the puzzle.

We all know that saving for an education is no easy task, and it seems even more challenging as tuition prices increase and learning evolves with technology like remote learning. There are unique ways to save, however, and a 529 plan is one of those methods. If you aren’t familiar with this savings plan, take a look and find out why this government-sponsored plan is a great way of creating a college fund for your loved ones.


The 529 Plan: An Easier Path to Creating a College Fund

The 529 plan has been around since 1980 and serves as a tax-advantaged savings plan for education costs. It’s a good example of a qualified tuition plan. These savings plans are sponsored by states, agencies, and educational institutions, and they are backed by section 529 of the Internal Revenue Code.

Creating a college fund is easier with a 529 plan because there are no income restrictions. You can also use the money in various ways that go beyond college or university tuition, including fees associated with room and board, books, supplies, or other necessary equipment. Furthermore, 529 plans were expanded in 2017 to include additional educational expenses, including fees associated with K-12 tuition.

The Two Types of 529 Plans

The two types of 529 plans to understand are prepaid tuition plans and education savings plans.

A prepaid tuition plan focuses primarily on tuition and mandatory fees. You can’t use a prepaid tuition plan for elementary or secondary schools, or other expenses associated with colleges or universities, like room and board. The federal government does not back these plans, but some state governments will guarantee the money paid into the plan. These often have residency requirements and must involve a participating university or college to receive the full investment amount.

An education savings plan allows you to spend the money on tuition and mandatory fees, as well as room and board. Any college or university can use the funds from educational savings plans, and sometimes you can use the funds at non-U.S. schools. These plans can also be used for tuition associated with elementary or secondary schools, and up to $10,000 per year can be allocated to these areas. These plans usually do not have residency requirements.

The Benefits of 529 Plans

There are several benefits to using a 529 plan for creating a college fund. First and foremost, many states provide state income tax breaks to donors. More than 30 states (and Washington D.C.) offer this type of tax benefit. Seven states offer state income tax breaks on any 529 plan, even if it’s not the beneficiary’s home state. These seven states include Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania. You can learn more about your state’s offerings by visiting this website from the National Association of State Treasurers. Furthermore, the principal grows at a tax-deferred rate, and distributions associated with college or university costs are also tax-exempt.

Another benefit of a 529 plan is how the assets are classified. A 529 plan does not count assets as part of the donor’s gross estate. Due to this, a 529 plan can also have value as an estate planning tool.

A 529 plan is ideal for those who want a hands-off approach to creating a college fund. Once you select your desired plan, fill out an enrollment form and make a contribution. The plan itself handles future investments and the assets are managed professionally, by either an outside investment company or by the state treasurer’s office.

Another positive benefit of a 529 plan is that qualified family members can have unused amounts of money from the account transferred to them without any tax penalty. This includes spouses, siblings, first cousins, children, in-laws, or parents.

So what are you waiting for? The sooner you get started, the more you can save.

Do you plan on using a 529 plan for creating a college fund, or are you already? Which type do you expect to use?


This post is periodically updated to reflect plan changes.

Nancy Zambell has spent 30 years educating and helping individual investors navigate the minefields of the financial industry. She has created and/or written numerous investment publications, including UnDiscovered Stocks, UnTapped Opportunities, and Nancy Zambell’s Buried Treasures under $10. Nancy has worked with for many years as an editor and interviewer for their on-site video studios.