A 529 plan is a tax-advantaged investment plan designed to encourage saving for the future higher education expenses of a designated beneficiary.

A 529 plan is a tax-advantaged investment plan designed to encourage saving for the future higher education expenses of a designated beneficiary. They are named after section 529 of the Internal Revenue Code 26 U.S.C. § 529. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits for investors who invest in 529 plans in their state of residence. Depending on the carrier, these benefits can sometimes include matching grant and scholarship opportunities, protection from creditors and exemption from state financial aid calculations.

There are two types of 529 plans: prepaid and savings. Prepaid plans allow one to purchase tuition credits at today’s rates, but are to be used in the future. Therefore, performance is based upon tuition inflation. Currently, 12 states provide a prepaid tuition plan. Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. Therefore, it’s important to realize that market losses & volatility can affect ones’ choices if the needed funds are no longer available at the time your child plans to go to college.

A 529 plan is a highly regulated “Rules-Based” plan and has a narrow margin for its use. There are many other ways to save for college that are more flexible and more importantly, that do not put the college money at risk. One should compare these alternatives before putting their savings into a “Rules-Based” plan that is subject to market risk and only allows for a single use if the money is to be used penalty-free.