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What is a 529 Plan?

Understanding the Basics of a 529 Plan

What is a 529 Plan?

As the price of tuition soars, students and their families often find themselves under a mountain of high-interest debt that can cost as much as a mortgage, but loans aren’t the only option for those looking to earn a diploma. In 1996, Congress amended the U.S. Internal Revenue Code, adding provisions under Section 529 that provide tax relief (as well as a number of other benefits) for families saving for college.

The resulting investment plans – formally called Qualified Tuition Programs, but more commonly known as 529 plans – give students, parents, and other family members an excellent opportunity to pay for higher education while minimizing the financial burden of student loans. Here, the team at Sootchy has compiled everything you need to know to understand the basics of 529 plans; keep reading to learn more.

Though they all fall under the auspices of Section 529 of the IRC, there are many different types of 529 plans out there, almost all of which are administered at the state level. In fact, each state has its own unique 529 plans, which can come in one of three forms: a prepaid tuition plan, a college savings plan, or an ABLE (or 529A) account. Each of these options comes with benefits, so the type you choose will ultimately depend on your family’s savings and investment goals. It’s worth noting, however, that a specific beneficiary (i.e., your child) can have multiple accounts, each in a different state, so you have a wide range of options when choosing how to save for college.

One trait that’s common across the various state programs is the tax advantage that comes with a 529 plan. As money is put into the account, it is invested by the plan administrator, potentially earning significant sums over the years and building up the resources available to pay for your child’s college education. Under Section 529, this income is entirely exempt from federal income taxes, so long as it’s put toward qualified expenses, such as tuition, and some states offer their own financial incentives on top of the federal tax break. That said, some plans come with substantial fees, and others carry greater risk, depending on the type of investment portfolio, so it’s important to shop around before committing to a particular 529 plan.

 

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