What Are 529 Plans?
So named because of it being the 529th section of the Internal Revenue Code, 529 plans are state college savings programs. The Department of Education defines them as follows:
All states have college savings programs designed to meet the savings needs of their citizens, known also as Qualified Tuition Plans. These programs seek to make the savings options easier for the average families. There are two types of plans:
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Prepaid Tuition: Parents, grandparents, and other interested parties may lock in today’s tuition rates, and the program will pay out future college tuition at any of the state’s eligible colleges or universities (or an equal payment to private and out-of-state institutions).
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529 Savings Plans: Savings plans allow participants to save money in a special college savings account on behalf of a designated beneficiary’s qualified higher education expenses.Both types of programs are considered “qualified state tuition programs” under the Internal Revenue Code Section 529 (26 U.S.C. 529). This allows earnings to be federally tax exempt beginning January 1, 2002. Most states exempt earnings from state income tax, and some states allow families to deduct the full or a partial amount of their contribution from their state income taxes.
The IRS defines eligible institutions as “any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education,†including certain foreign institutions. To determine eligibility, please visit the Federal School Code Search page.
Each qualified state tuition program operates under individual state laws, so programs may vary from state to state. The College Savings Plan Network provides general information on the plans and state contacts. Technical information on 529 Plans and other tax benefits for higher education is available from the IRS.
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