An Introduction to 529 Plan


What is a 529 plan?


529 plan is a tax-advantaged education savings plan sponsored by a state or state agency.This plan is designed to encourage saving for the future higher education expenses of a designated beneficiary.

This college savings don’t just cover tuition, a 529 plan can be used for tuition and other education-related expenses at most accredited colleges and universities. According to the IRS, it covers eligible expenses like computer technology or equipment. And that applies to desktop computers, laptops and any device connected to the computer. Internet, without the current model of education, does not function is also included.

Also, meal plans, room and board and most other expenses related to schooling may be covered.

Additionally, a 529 plan cannot be used to pay for student loans.

529 plan history

1996- as a piece of legislation authorizing “qualified tuition programs” section 529 was added to the Internal Revenue Code. Funds placed in these programs are not taxed federally when used for “qualified higher education expenses”.

1997- 529 plan becomes part of the Taxpayer Relief Act of 1997 (TRA).

During years some changes happened, such as a deduction on student loans, penalty-free IRA withdrawals for higher education, and adding room and board to the list of qualifying expenses.

2017- 529 plan was expanded to in to include K-12 public, private, and religious school tuition

Types of 529 plans:

There are two major types of 529 plans: prepaid tuition plans and college savings plans.  At least one type of 529 plan is sponsored by all states and the District of Columbia.

Prepaid tuition plans

Prepaid tuition plans are educational savings programs that are warranted to increase in value at the same rate as college tuition. Most prepaid tuition plans are sponsored by state governments. You should check if they have residency requirements for the college saver and/or beneficiary.

The main benefit of these plans is that they allow a student’s parents to lock in tuition at current rates, offering them stability. This benefit includes a better rate of return on an investment than bank savings accounts and certificates of deposit.

Prepaid tuition plans are operated by state governments.

College Savings Plans

College savings plans allow saver to open an investment account to save for the beneficiary’s future. A 529 savings account offers a mix of benefits that will get you closer to your goal. A college saver may typically choose among a range of investment portfolio options. This option often includes various mutual funds and exchange-traded fund (ETF) portfolios and a principal-protected bank product.

State governments do not guarantee investments in college savings plans. But investments in some principal-protected bank products may be insured by the FDIC.

Choosing the Right Type of 529 Plan

How to choose the right 529 plan type?

Well, you should examine the range of plans or programs available for each type of 529 plan.


To make the right choice, you need to define what benefits you need or find attractive. Also, you should compare the features and benefits offered by your state of residence with those of the plans offered by other states

When you collect and evaluate all the necessary facts, decide for one of 529 plan types. The important thing is to make a choice and start early as possible. Starting early increases the compound effect of the earnings on contributions. And for prepaid tuition programs, the cost of tuition is usually less if prepayments are made earlier.

Investing in a 529 plan affect federal and state income taxes

Before you invest in a 529 plan, which may offer college savers special tax benefits, you should make sure that you understand the tax implications of this investing. Depends on that,  consider whether to consult a tax adviser or not.

Generally, from a 529 plan are exempt from federal income taxes. Withdrawals can be used for qualified educational expenses. If you withdraw money from a fund for a purpose that is not an educational character, then that withdraw are subject to taxes and a 10% fee, with exceptions for circumstances such as death and disability.

Although contributions to the 529 plan do not provide a reduction of your federal income tax burden by lowering your taxable income. More than 30 states provide tax deductions or credits for contributions in a 529 plan. In addition, 529 plans do offer certain federal tax advantages for contributions.

Contributions to a 529 plan

Many states provide tax benefits for contributions to a 529 plan. But be aware that college savers may only be eligible for these benefits if you invest in a 529 plan sponsored by your state of residence.

As for the contribution limits, it seems to accompany an increase in tuition fees.  Most states will raise their limits each year to keep up with rising college costs. These days states have contribution limits of $300,000 and up.

A state’s limit will apply for 529 prepaid tuition plan or a college savings plan.

The prepaid plan has a states limit and that limit applies to the total contributions. Because of this, you can’t contribute more than a limited amount.

A college savings plan limits the value of the account for a beneficiary. The contribution will not be accepted when the value of the account reaches the state’s limit.

If you have accounts in more than one state, check with plan’s administrator if contributions to other plans count against the state’s maximum. Generally, contribution limits don’t cross state lines. Some plans may also have a contribution limit, both initially and each year.


Earnings in the 529 accounts are not subject to federal income tax and, in most cases, state income tax. So you can use 529 account withdrawals for qualified higher education expenses without additional fees.  On the other hand, if 529 account withdrawals are not used for qualified higher education expenses, they will be subject to state and federal income taxes and an additional 10% federal tax penalty on earnings.

NOTE: The beneficiary has no claim on the assets, which can be withdrawn by the holder for any reason at any time, with penalties.

Investing in a 529 plan impact financial aid eligibility

Each educational institution may treat assets held in a 529 account differently. But, investing in a 529 plan will generally impact a student’s eligibility to receive need-based financial aid.

These days,  many families have a larger part financial aid package in loans. So it’s important to save more before college, because the less debt you or your student may have to incur during college.

Benefits of using 529 plan

529 plans offer amazing tax breaks. Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college.

Over 30 states currently offer a full or partial tax deduction or credit for 529 plan contributions. So maybe your own state offer tax breaks as well

Donor controls the account. The named beneficiary has no legal rights to the funds so you can assure the money will be used for its intended purpose.

Easy enrollment – simply visit the plan’s website or contact your financial advisor.

Most plans allow you to “set it and forget it” with automatic investments that link to your bank account or payroll deduction plans.

You have ability to change your 529 plan investment options twice per calendar year.

Everyone can take an advantage of a 529 plan.

Contributions to a 529 plan do not have to be reported on your federal tax return.

529 plan has no income limits, age limits or annual contribution limits.

Pay Attention to Fees

Every 529 plan has some kind of fees.Usually, it is an advisor fee, program management and maintenance charges and underlying investment fees.

The in-state tax deduction, if available an, can offset a number of plan fees. Different plans will have different fees. Generally, actively managed funds will carry higher underlying expenses than index funds. Managers also waive fees for various reasons, including if you fund your account via direct deposit. Before you choose a plan, be sure to look into any fee waivers that may apply.

Federal Policies on 529s you should be aware of


Every state has its own set of 529 regulations,  but  the federal regulations apply to all 529 plans, whether they are national, state, direct-sold or advisor-sold

While each state enforces its own set of 529 regulations, the federal government enforces certain policies on all 529 plans, whether they are national, state, direct-sold or advisor-sold.

The rule is that only one person can own a 529 account, and there can only be one beneficiary to that account. Also, one person can own multiple 529 accounts. But, a beneficiary can receive contributions from all these accounts only if the collective amount of money in all the accounts does not exceed the state maximum limit on contributions.

Account owner, parents, grandparents, and others can contribute to the plan. Owner of the 529 plan account can change the beneficiary to one of the beneficiary’s relatives.In case of the account owner’s death, a new account owner can be named without tax penalties.

There are no income restrictions on who can own or contribute to a 529 plan.

For more information on qualified tuition programs, see the Internal Revenue Code.