529 College Savings Plans
Section 529 plans are designed to encourage saving for future college costs. The plans are named after Section 529 of the Internal Revenue Code and are legally known as qualified tuition programs. Similar to the idea of qualified retirement plans, “qualified” in this case means exemption from federal taxes on earnings and withdrawals if the plans are used for qualified educational expenses. Qualified expenses include tuition, school fees, books, school supplies, school equipment, such as computers, and reasonable room and board expenses (for those students attending school at least half-time). Also included are other expenses associated with special needs services if the beneficiary is a special needs student. Section 529 plans can only be used for higher education and are not designed for primary or secondary education.
There are two types of 529 plans: college savings plans and prepaid tuition plans. A college savings plan is a tax-free savings plan that offers families professionally managed portfolios to help meet anticipated college costs. College savings plans are subject to risk, because their returns are based on the market performance of the underlying securities within the plan. College savings plans are administered by states, often with recordkeeping and administrative services contracted out to a mutual fund company or other financial services company. College savings plans are considered municipal securities, and are therefore subject to MSRB rules, but they are exempt from many registration requirements.
Prepaid tuition plans generally allow participants to purchase units or credits at part