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529 Plans

Saving for college using section 529 plans and education IRAs

  • Saving for college is tough. That is why you need to view the investment and tax benefits of 529 Plans.

  • Use your 529 plan to save for future college costs.
  • Section 529 plans can be used to pre-pay tuition costs in current dollars. You student can then be assured college costs that meet future costs.
  • Section 529 plans can be used to save for college using investment plans that allow contribution and distributions Tax Free.


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State 529: What Are They?

  • Savings programs (plans) established and administered by States for the purpose of setting aside savings for "qualified higher education expenses".

  • These programs are often referred to as "529 Plans", named after the IRS code that outlines the details of the plan.

  • Outline of the 529 Plan is as follows:

    ·· a family member setups a fund with one of the States that sponsors 529 College Prepaid Tuition and/or Savings Plans
    ·· most State 529 Plans have open enrollment to State residents and non-residents. However, there are about 3-4 State 529 Plans that are closed to State non-residents (although this number is decreasing).
    ·· State 529 Plans may offer different investment strategies that the account donor may select from based on their investment objectives
    ·· some State 529 Plans offer incentives such as a guaranteed return or matching contributions
    ·· the donor can roll-over the fund to another state plan at least once every 12 months
    ·· all plans are available to qualified participants regardless of age and income
    ·· the account donor will name a beneficiary to the fund, which can be changed at any time
    ·· you may setup up your own savings plan naming you as the beneficiary if you plan to go back to school
    ·· contributions can be in the form of scheduled donations that can range from $15 per month or more, or contributed at once up to the aggregate maximum of $250,000
    ·· you can contribute into more than one state's plan up to the maximum aggregate amount: $250,000
    ·· key benefits of the program is its exemption from taxes if the plans meets basic IRS requirements — see tax discussion below
    ·· many states offer their own state tax exemption rules
    ·· the "named" beneficiary can withdraw funds from the 529 Plan "tax-free" to pay for qualified education expenses; i.e., tuition, room & board, books, and fees
    ·· the donor maintains complete control over the account, naming the beneficiary and controlling how the funds may be used
    ·· the donor can transfer the account to another beneficiary if the original beneficiary decides not to attend school
    ·· there are two-types of plans (link below):
    1. Prepaid College Tuition Plans
    2. College Savings Plan

    you can find more detailed information at:

    National Association of State Treasurers:

Several key tax advantages are available:

  • Tax exempt earnings:

    ·· earnings from your investment are tax free as long as the money stays into the plan and is used for "educational purposes"
    ·· "educational purposes" include tuition, room & board, books, supplies, and fees
    ·· there is a federal penalty fee of 10% if the earned funds are withdrawn for "non-educational" purposes — state penalties may also apply
    ·· the earned portion of non-qualified withdrawals will be counted as taxable income to the donor
  • Withdrawals from the fund are exempt from taxes:

    ·· starting in January 2002, all qualified distributions from the fund are exempt from federal taxes
    ·· the exemption applies to the increase in value of pre-paid tuition units at a state-sponsored plans
  • Plans can be rolled over:

    ·· participants can transfer their money from one state's 529 plan to another state's 529 plan at least once every 12 months
    ·· rollovers allow participants to change their investment strategy if another plan better matches their objectives
    ·· rollovers to another plan can occur at any time when a change of beneficiary to the plan has been made
  • Expansion of the term "family member":

    ·· participants can open a fund for any "family member", which has been expanded to include first cousins
    ·· donors maintain complete control over the fund, naming a "family member" as the beneficiary
    ·· the account donor may change the beneficiary at any time
  • Contributions to 529 Plans:

    ·· participants can make contributions to the account ranging from $15 per month to an aggregate total of $250,000, over a scheduled contribution period or all at once
    ·· contributions made to a plan qualify for the $10,000 annual gift exclusion
    ·· up to $50,000 ($100,000-joint) may be "gifted" into the plan without a gift tax. The $50,000 contribution can be treated as a contribution made over a five year calendar period (assuming that no other gift is given to the beneficiary within 5 years)

State 529 Plans: Prepaid College Tuition Units

  • State 529 Plans that allow you to prepay college tuition at current prices:

    ·· for example: let's say that the cost in current dollars to attend a four-year public university is $35,000 (includes tuition, room and board).
    ·· if college costs increase 6% each year, the cost of attendance in 15 years will equal $83,880 annually.
    ·· you can lock in the current cost of attendance by "pre-paying" college tuition at today's price.
    ·· use our calculator to estimate your own numbers

  • Prepaid plans typically follow the inflationary index of "in-state" public institutions. Thus, most plans only guarantee 100% coverage if the beneficiary attends a public in-state college or university.

  • You will be able to transfer prepaid tuition contracts to a private or out-of-state school. Note however that you may not receive the full value of your contract.

  • Prepaid plans will be considered under that same guidelines as scholarships when the student apples for government financial aid. The student's financial aid need could be reduced dollar-for-dollar.

    Note: eligibility for financial aid is based on a number of factors that can change over the years. See our Student Financial Notes below

  • Beginning in 2004, a consortium of private universities will introduce tax-exempt prepaid tuition plans for use at private colleges and universities

    Family members will be able to purchase "tuition shares" that can be redeemed at any of the member private institutions.

  • Only a handful of States offer Prepaid College Tuition Plans. Most States offer 529 College Savings Plans.

  • View State Prepaid College Tuition Plans:

    click here to open State list

State 529 Plans: College Savings Plan

  • State 529 plans that operate similar to 401(K) plans with the exception that contributions are after-tax:

    ·· the donor will make a contribution into a State 529 plan
    ·· the plan will be managed by an investment management team (on behalf of the State)
    ·· the plan will invest the funds into mutual funds, stocks, bonds, and CDs (this may vary by state)
    ·· most state plans allow a selection of funds with different investment strategies — most states will permit you to switch between funds whenever you like
    ·· the "named" beneficiary can withdraw funds from the 529 Plan "tax-free" to pay for qualified education expenses; i.e., tuition, room & board, books, and fees
    ·· depending on the fund, it may follow an aggressive growth strategy (stock funds) when the beneficiary is young to later converting to a conservative growth strategy (bond funds) when the beneficiary nears college time
    ·· you may switch your account to another State 529 Plan at least once every 12 months
    ·· you may invest in several State 529 Plans up to an aggregate amount of $250,000
  • 529 Savings Plans do not carry guarantees (unlike most pre-paid tuition plans). There is risk that you could lose value in a particular plan.
  • You can switch from one state plan to another state plan at least once per year — most savings plan are open to all resident and non-resident participants.

  • Proceeds may be used at any school your beneficiary decides to attend — public or private, in-state or out-of-state.

  • Qualified distributions from the fund are exempt from Federal and most state taxes.

  • View State College Savings Plans:

    click here to open State list

Analyze Investment Objectives

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Notes: Student Financial Aid Process

  • Review our notes in our College Planning Center on the student financial aid process:

    Note 2: qualifying for student financial aid
    Note 3: reviewing the financial aid process

  • 529 Savings Plans are counted as assets of the parent or guardian when calculating the "Expected Family Contribution" (EFC).

  • The portion of the 529 Plan that will be included is 5.6%, or less, of the funds value for each academic year.

  • Funds used from the plan to pay for the beneficiary's education costs will be included next year as income to the student when considering eligibility for financial aid.

  • The portion of funds included as income may vary by institution. In addition the formula used to calculate EFC frequently changes. How 529 plans will be treated in the future is too premature to review at this time.

  • Note that most financial aid comes in the form of loans. So the inclusion of 529 plans may not affect eligibility for student loans.

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