A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. It is also known as a Qualified Tuition Program. The plan is sponsored by states, state agencies, or educational institutions and is authorized by Section 529 of the Internal Revenue Code. The plan allows individuals to save for qualified education expenses for a designated beneficiary, which can include college, K-12 tuition, and certain apprenticeship costs. The two types of 529 plans are education savings plans and prepaid tuition plans. Education savings plans let a saver open an investment account to save for the beneficiary’s future qualified higher education expenses, while prepaid tuition plans allow one to purchase credits at participating colleges and universities for future tuition and mandatory fees at current prices.

Contributions to 529 college savings plans are made with after-tax dollars, and once money is invested in the account, it grows tax-free. Withdrawals from the plans are not taxed when the money is used for qualified educational expenses. There are no income restrictions for 529 plans, and anyone can contribute to an account until that account has reached its contribution limit. The funds in a 529 plan are owned by the account holder until the money is withdrawn.

It is important to consider your investment objectives and compare your options before you invest in a 529 plan. Nearly every state has at least one 529 plan available, but you’re not limited to using your home state’s plan. Each 529 plan offers investment portfolios tailored to the account owner’s risk tolerance and time horizon. It’s also important to note that there may be 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 in their state of residence.