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529 plans (also known as a "qualified tuition program") were created under the Small Business Job Protection Act of 1996 (SBA '96) as a means of allowing tax-payers to save for paying for higher education expenses for a designated beneficiary. A 529 plan may be provided by a State, an agency of the state or by an educational institution.
Like the education savings account (ESA), the 529 plan is an excellent way to save for education expenses. Earnings accumulate on a tax-deferred basis and distributions that are used for qualified education expenses are tax- and penalty-free. Unlike the ESA, the 529 plan may be set up in a way that allows individuals to prepay a student's qualified higher-education expenses at an eligible educational institution. Also, the contribution limits for a 529 plan are considerably higher than those for an ESA.
There are two types of 529 plans:
- Prepaid tuition programs: Which may be offered by a State of eligible educational institution, allows the advance purchase of credits for the designated beneficiary. These are usually established during enrollment periods established by the State of eligible educational institution.
- College savings plan: This allows contributions to be made to the account on behalf of the designated beneficiary. These can usually be established at any time, including immediately after the designated beneficiary is born.
Individuals would review the feature and benefits of both types of 529 plans to determine which is more suitable for the designated beneficiary.
The designated beneficiary under for a 529 plan is the student on whose behalf the plan is established .The designated beneficiary can be changed to an eligible person. Typically, the designated beneficiary is changed if the current designated beneficiary will not need the funds in the 529 plan for eligible education expenses. If a state or local government or certain tax-exempt organizations purchase an interest in a 529 plan as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship.
For purposes of a 529 plan, an eligible educational institution is any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education. This includes virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
Individuals should check with the educational institution to determine if it is an eligible education institution for 529 plan purposes.
Detailed information on each State's 529 plan is available at www.collegesavings.org.
Next: 529 Plans: Eligibility
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