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What is a 529 Plan?

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What is a 529 Plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs and includes pre-paid tuition plans and college savings plans. The difference between them is that pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board; and college savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age.

The following chart outlines some of the major differences between pre-paid tuition plans and college savings plans.


Prepaid Tuition Plan College Savings Plan
Locks in tuition prices at eligible public and private colleges and universities. No lock on college costs.
All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.

Covers all "qualified higher education expenses," including:
Tuition
Room & board
Mandatory fees
Books
computers (if required)
Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased. Many plans have contribution limits in excess of $200,000.
Many state plans guaranteed or backed by state. No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.
Most plans have age/grade limit for beneficiary. No age limits. Open to adults and children.
Most state plans require either owner or beneficiary of plan to be a state resident. No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.
Most plans have limited enrollment period. Enrollment open all year.

(Source: Smart Saving for College, FINRA®)


Tax Benefits:

Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. Is investing in a 529 plan right for you?

Contact your account manager or call (888) 680-8800for more information.

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