16.6.1. 529 Plans
Section 529 plans are 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 expenses for higher education. There are two types of 529 plans: college savings plans and prepaid tuition plans.
A 529 college savings plan is a tax-free savings plan that offers families professionally managed portfolios to help meet anticipated costs of college and apprenticeship programs. These 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.
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 with a 529 college savings plan, you may only choose a portfolio; you cannot purchase individual securities within a 529 college savings account.
There are typically two types of investment approaches followed by participants in college savings plans: age-based and static-choice options. Age-based investing, sometimes called target-date investing, involves the automatic adjustment of portfolio assets from a higher percentage of equities in the early years to a higher percentage of a lower risk fixed income securities and cash as the student’s college enrollment date approaches. In contrast, with a static-choice option a 529 account portfolio will typically maintain the same asset allocation for the plan’s duration.
Section 529 college savings plans were originally intended to be used to pay for higher education only. At the beginning of 2018, this restriction was loosened to include up