The 529 plan is designed specifically as a prepayment arrangement for higher education. It is made available to potential students at eligible educational facilities. Also called a “qualified tuition program,” this sort of investment plan is used as a contribution towards the expenses associated with higher learning.
Named for the section of the Internal Revenue Code which addresses the stipulations of the plan, 529 plans offer investors the best benefits when used in-state. Advantages for investors can include grant matching, scholarships, and protection from creditors. These funds are also exempt from financial aid calculations if invested in the state of residence.
That said, you don’t have to invest your funds in your state, or even the state where you plan to attend college. Most states offer a 529 plan and the terms will differ from location to location. It is best to carefully investigate each plan you are considering before investing.
Two types of 529 plans exist; these are savings and prepaid. Savings plans require that all growth be dependent upon market performance of the underlying investments. That’s a fancy way of saying they should consist of mutual funds.
12 states offer a prepaid option. Prepaid plans allow the investor to purchase tuition credits at today’s costs and use them in the future. The return on investment is based upon inflation.
Either states or educational institutions can administer prepaid 529 plans. 529 savings plans must be administered by the specific state, although the actual work is usually handled by the mutual fund company. Qualified distributions used to pay for expenses at schools of higher learning are exempt from federal income tax.
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