Qualified Tuition Plans
A Qualified Tuition Plan, known more commonly as a 529 plan, is a college savings plan that gives tax benefits to both the contributor and the recipient. It was authorized in 2003 by the IRS (Section 529 of the Internal Revenue Code) to encourage and help people save for college. The big advantage of a 529 plan is that it allows earnings in the account to grow tax-free and to be withdrawn tax-free at the federal level.
529 plans are typically organized through a specific state, and contributors who use their own state plan may receive certain state tax benefits as well. For example, contributors to 529 plans in some states may be able to deduct their donations from their own state income tax and withdraw earnings at the state level tax-free. Contributors who use other state plans typically do not receive tax benefits at the state level.
The 529 plan comes in two types.
- • Pre-paid tuition plans allow investors to purchase units or credits at participating colleges for future tuition. A semester’s worth of pre-paid tuition at today’s prices would pay for a semester’s worth of tuition at any future date. Most pre-paid tuition plans are sponsored by state governments and have residency requirements. Investments into the plan are generally guaranteed.
- • College savings plans permit the investor to establish a savings account to pay for a student’s eligible college expenses. The contributor typically chooses from several investment options. Options that invest in mutual funds are not guaranteed or insured by the federal government. Withdrawals can generally be used at any college or university.
529 accounts are funded with after-tax dollars.