A 529 plan is a tax-advantaged investment vehicle designed to
encourage saving for the future higher education expenses of a
designated beneficiary. It is named after section 529 of the
Internal Revenue Code. The detailed behavior of 529 plans are
determined by state legislation, and while most plans allow
investors from out of state, there can be significant state tax
advantages and other benefits, such as matching grant and
scholarship opportunities, protection from creditors and
exemption from state financial aid calculations, for investors
who invest in 529 plans within their state of residence.
There are two types of 529 plans: prepaid and savings.
- Prepaid plans allow one to purchase tuition credits, at today's rates, to be used in the future. Therefore, performance is based upon tuition inflation.
- Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college-age. They also offer risk-based asset allocation options where the underlying investments maintain the same equity-to-fixed-income ratio regardless of the age of the beneficiary. Many savings plans also offer a stable value or guaranteed option designed to protect an investor's principal while providing for some investment growth, while others offer investments in certificates of deposit.
Prepaid plans may be administered by states or higher education institutions. Savings plans may only be administered by states. Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company.
529 Pros
- All money grows federal and state income-tax free.
- The account holder retains control of the assets within the program regardless of beneficiary's age.
- The beneficiary can be changed at any time to another member of the beneficiary's family.
- Many states exempt withdrawals from state income-tax for qualified higher education expenses.
- Money can be used virtually everywhere—over 8,000 schools in the U.S. and over 800 foreign schools.
- Money can be used to pay for tuition, fees, room, board, books, supplies and required equipment.
- High maximum contribution limits.
- Contributions are exempt from gift and estate taxes if certain criteria are met.
- Assets within 529 plans are often protected from bankruptcy within the state offering the plan.
- Most plans have very low minimum monthly contribution limits making them attractive to all families regardless of income level.
- Each state offers a no-fee, low cost option that can be opened by contacting the plan directly.
529 Cons
- Investments are limited
- Costs and fees may be high
- Performance track records are low
- Socially responsible investments are not available
Compare 529 plans with other college savings vehicles.
Some of the best 529 plans in the country are available to those in all states. For your convenience we have reviewed an Arizona-local 529 plan and two other favorites.
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