529 Plan
IntermediateA 529 plan is a tax-advantaged savings plan in the United States designed to help families save for education costs, such as college tuition, in which investments grow tax-free and withdrawals for qualified education expenses are not taxed.
529 plans are named after Section 529 of the US tax code and are sponsored by states or educational institutions. There are two main types. Education savings plans let families invest money in funds whose value rises or falls with markets. Prepaid tuition plans let families buy future tuition at participating colleges at today’s prices.
Contributions are not deductible for federal tax, but many states offer a state tax deduction or credit. Earnings grow tax-free, and withdrawals are tax-free if used for qualified education expenses, which include college costs and, within limits, some school tuition and apprenticeship costs.
For example, parents who start investing in a 529 plan when their child is born might accumulate a substantial sum by the time the child goes to university, with all the growth free of tax.
Withdrawals for non-qualified purposes face income tax and a 10% penalty on the earnings. Unused money can be transferred to another family member and, under rules introduced in recent years, a limited amount can be rolled into a Roth IRA for the beneficiary.
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