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Overview of 529 Plans

How 529 Plans Work


529 plans are programs that allow people to save money for higher education. While each state has its own 529 plan, all 529 plans share some features. Let’s look at some basic features to help you save for college or graduate school.

529 Plan Overview

A 529 plan is a program offered by a state. 529 plans are intended for college savings dollars, although some creative people have used 529 plans for other purposes.

Here are some basics of 529 plans:

  • Within a 529 plan, you can invest your money for growth
  • You may get a state tax deduction if you use your state’s 529 plan
  • If you follow all of the IRS guidelines for 529 plans, you enjoy tax-free growth
  • The donor to a 529 plan keeps control of the money – it is not irrevocably given to the child
  • A 529 plan donor can change beneficiaries (in some cases without tax consequences) – for example, if the oldest child gets a scholarship the parent may shift the 529 plan funds toward the younger child’s education.
  • You can make relatively large dollar contributions to a 529 plan – check with your state for detailed limits
  • You can use another state’s 529 plan although you need to have a really good reason for giving up the tax deduction

Some Fine Print on 529 Plans

After reading the highlights above, it may sound like 529 plans ideal. However, you should be sure to do some more homework and find out the details of any specific 529 plan that you’re interested in. They’re all a little bit different.

You can find the details on a 529 plan by reading the disclosure statement. Some 529 plans call this the “offering statement” and/or “prospectus”. There, you’ll learn a lot of good information.

Also, be aware that tax laws (such as those revolving around 529 plans) are very complex, and subject to change. You should speak with a qualified tax advisor before doing something that could get you in trouble with the IRS.

Disclosure: Justin Pritchard is a financial advisor with Financial Network Investment Corporation, Member SIPC.

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