529 Plans are college savings plans operated by the state or educational institution. The main advantage of a 529 plan is that earnings are not subject to federal tax when used to pay for qualified education expenses. Contributions to the plan are not tax deductible.
There are two kinds of 529 plans, pre-paid tuition plans and college savings plans. Pre-paid tuition plans lock in tuition prices at eligible institutions. College Savings Plans cover “all qualified higher education expenses” and are not limited to a select number of colleges and universities. You can look up eligible schools here. They also don’t have residency requirements, limited enrollment periods, or age limits as do Pre-Paid Tuition Plans. You can see a comparison of differences at the SEC website.
In addition to the federal tax benefit, some states offer a similar benefit. You need to check with your state or financial advisor for a complete listing of benefits for state income taxes.
529 Plans held in the student’s name are for federal financial aid purposes assessed at the maximum parental rate of 5.64% rather than the 20% for student savings. If you withdraw money from the 529 account and do not use it for eligible college expenses, the money is subject to income tax and a 10% federal tax penalty on earnings.
You can compare 529 Plans at: