What is a 529 Plan?

Tricia Christensen
Tricia Christensen

A 529 plan is a college savings investment plan that offers significant tax breaks for its beneficiaries. The 529 plan is so named after Section 529 of the Internal Revenue Service (IRS) US federal tax code. The savings plan has many advantages and has become a popular way to save money for a child’s education.

The 529 plan is so named after Section 529 of the IRS US federal tax code.
The 529 plan is so named after Section 529 of the IRS US federal tax code.

The 529 plan may be affected by state tax code, and in each state differences will occur. However, from the standpoint of paying federal taxes, the tax benefits of the 529 plan are tremendous. Although this section of code was added in 2001, it has now been made into permanent law via the 2006 Pension Protection Act.

The 529 plan has two basic types. A person can elect to deposit a lump sum, up to 60,000 US dollars (USD) per every five years, or up to 120,000 USD if a married couple sets up the plan. Alternately, people can make small monthly contributions to a 529 plan.

The lump sump investment in a 529 plan is offered by colleges, and sometimes states. The amount invested is usually guaranteed. Money market funds investors usually administrate the money in order to grow the investment. If a large lump sum is invested, the goal is to bring that fund up to the cost it will take for a child to attend college down the line, as fees will likely rise during the child’s lifetime.

A 529 plan where small contributions are made tends to be offered in each state, and may be administrated by several different sources. Some programs offer matching funds to help increase investments made by those who cannot afford to invest very much.

The big difference between the 529 plan and prior college savings plans is that children do not get taxed when they withdraw the money to attend college. Further, all funds can be used to pay tuition, books, living expenses, and any necessary equipment. Theoretically, a college student could purchase a computer with a 529 plan, or use funds for travel to another country as part of an exchange student program.

Another advantage of the 529 plan is that the money is protected if the family undergoes bankruptcy. Essentially, the money is unassailable until the child attends college. Also the 529 plan usually provides for tax protection on any money made as a result of the investment, as long as it is reinvested in the plan. Thus no taxes are paid on money made from mutual funds or savings in which the plan might be invested.

Private businesses and most states offer variants of the 529 plan. It is important to evaluate the specifics of each plan prior to deciding where to place one’s money. Some plans have distinct advantages over others. Before making a decision, be certain to read all information regarding several different plans in order to make a reasoned decision about where to place one’s investment.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent wiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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Discussion Comments


@indigowater - The 529 college plan grows tax free for the time you invest in it, and is tax free when you use it for college expenses.

If your child ends up with a free ride (full scholarship), then you can use the money for anything — you just have to pay tax on your earnings. Of course, every state plan has its differences and I'd double check with your particular pre-paid plan.


We are planning on putting small monthly amounts in a 529 college savings plan for each of our grand kids. What happens if my 'brilliant' grandchild ends up with a full scholarship and doesn't need the 529?


@seafoam - I had to deal with this exact issue. There are several choices, depending on the 529 savings plan you have.

You can leave the savings there for a later date if your child gets it together and decides to go back to college at a later date (after experiencing the real work world of low pay and long hours).

You can even change beneficiaries with some plans. Like if your daughter doesn't want to go to college but say, your step-son does, you can switch the funds to his name.


What happens if your child doesn't end up attending college after you've saved all that money in a 529 investment plan?

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