3.6.1. 529 College Savings Plans
A 529 college savings plan is designed to encourage saving for future college costs. 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 the following expenses 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), and expenses associated with special needs services if the beneficiary is a special needs student. Qualified expenses also include up to $10,000 per year for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school, as well as 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 securities and are, therefore, subject to MSRB rules, but they are exempt from many registration requirements.
Typically, a contributor to a 529 college savings plan can choose among several different investment portfolios, which may contain mutual funds and exchange-traded funds. It is important to note that