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The 529 Plans 

General Information For 529 Plans 

As the name implies, a 529 Plan was established by Section 529 of the Internal Revenue Code and allows you, or a relative, or a friend, to prepay college tuition, or to contribute into an account established for future, qualified, educational expenses at an eligible college or university. 

In addition to 529 Plans, there are a number of additional names by which these college savings plans or programs are commonly known.  Sometimes, they are called “Qualified Tuition Programs,” “Section 529 Plans,” or “State 529 Plans.”

One of the main benefits of 529 Saving Plans is it that they allow for appreciation of the investment, within a federal income tax-free environment.  When used for education, the benefits from 529 Plans can then be received, without any federal tax consequences.  When choosing this plan or similar ones, you should always be aware of the tax benefits attached to a particular plan.

529 Plans are independently established, maintained, and administered by the states and state-approved entities.   Therefore there are some differences among them.  Although most plans allow contributions from out-of-state, there can be significant state tax advantages for those who contribute to 529 Plans, within their actual state of residence.  The established maximum total contribution limits for the plans are large, and are generally greater than $200,000. 

The contributor provides the money, which becomes earmarked for a designated beneficiary, who may or may not be a relative.  The beneficiary can then receive assistance, when he or she attends an eligible educational institution.  This institution can be a college, university, vocational school, or other postsecondary educational institution that is eligible to participate in a student-aid program. These programs are administered by the U.S. Department of Education.  A beneficiary must be a U.S. citizen or a resident alien, and must have a social security number or federal tax identification number. 

The contributor maintains control over the money in the 529 account, in order to determine any modifications in its management, and also to make a beneficiary name change to a different family member, if desired. 

Types of 529 Plans

There are two plan types that are allowed under the Internal Revenue Service (IRS) regulation.  They are “Prepaid Tuition Plans” and “College Savings Plans.” 

Prepaid Tuition Plans allow the contributor to purchase college tuition credits, at current prices, to be used in the future, when the tuition costs are anticipated to be at a higher level. Performance for this type of plan is based on the rate at which college tuition costs actually increase over the years. 

Conversely, College Savings Plans allow the contributor to purchase ownership in investment plans, which are anticipated to rise in value as their underlying securities rise in value.  However, there is no guarantee that the savings plan will accrue future value.  College Savings Plans offer a variety of investment options, similar to mutual funds, which allow for various risk-reward tradeoffs

Each state independently sponsors Prepaid Tuition Plans and/or College Savings plans.  The contributor to a Prepaid Tuition Plan needs to review the plan documents closely before committing money, in order to determine what rules and restrictions the particular plan imposes.

Prepaid Tuition Plan Information 

Prepaid Tuition Plans are normally designed to be used by residents of the state that offers the plan, and is intended to be used at public institutions within that particular state.  However, many plans are available to nonresidents, and frequently, the tuition credits can be used at a public institution located in another state.  Sometimes, these credits may also be redeemed at private institutions. 

College Savings Plan Information 

Besides college tuition, distributions from College Savings Plans may be used for required fees, books, supplies, and equipment.For students who are enrolled at least part-time, the reasonable costs of room and board might also qualify, within the established IRS guidelines.

529 Plan Refunds 

The contributor can request a refund, and the account would be refunded according to the policies stated in the specific 529 plan documents.  For College Saving Plans, the refund would include any earnings in the account.  Under federal law, there may be income tax consequences, including a refund penalty of 10%, except in the case of a student’s death, disability, or the receipt of a scholarship.  An alternative to a requesting a refund could be transferring the benefits of the plan to another member of the student’s family.  Read IRS Publication 970 for detailed information about the regulations. 

References:

Tax Benefits for Education

(Official IRS Publication 970) 

College Saving Plans Network

(Non-profit affiliate of the National Association of State Treasurers)