3.10.2. 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. As with qualified retirement plans, “qualified” in this case means exempt from federal taxes on earnings and withdrawals if the plans are used for qualified educational expenses. Qualified expenses include any of the following for higher education (such as college and apprenticeship programs):
- • Tuition
- • School fees
- • Books
- • School supplies
- • School equipment, such as computers
- • Reasonable room and board expenses (for those students attending school at least half-time)
- • Expenses associated with special needs services if the beneficiary is a special needs student
The term “qualified higher education expense” includes up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. It also includes up to $10,000 worth of student loan payments (total, not per year) for the beneficiary or beneficiary’s siblings, as well as expenses associated with apprenticeship programs.
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 fund securities, and are therefore subject to MSRB rules. Because they are municipal fund securities, they are exempt fro