A 529 college savings plan is a tax-advantaged savings plan designed to help pay for education. Originally limited to post-secondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019. The two major types of 529 college savings plans are savings plans and prepaid tuition plans. Savings plans grow tax-deferred, and withdrawals are tax-free if they're used for qualified education expenses. Prepaid tuition plans allow the account owner to pay in advance for tuition at designated colleges and universities, locking in the cost at today's rates. 529 plans are also referred to as qualified tuition programs and Section 529 plans.
Although 529 college savings plans take their name from Section 529 of the federal tax code, the plans themselves are administered by the 50 states and District of Columbia. Anyone can open a 529 college savings plan, but they are typically established by parents or grandparents on behalf of a child or grandchild, who is the account's beneficiary. In some states, the person who funds the account may be eligible for a state tax deduction for their contributions.
The money in the account grows on a tax-deferred basis until it is withdrawn. As long as the money is used for qualified education expenses, as defined by the IRS, those withdrawals aren't subject to either state or federal taxes. In the case of K-12 students, tax-free withdrawals are limited to $10,000 per year.
Other Considerations:
As with other kinds of investing, the earlier you get started, the better. With a 529 savings plan, your money will have more time to grow and compound. With a prepaid tuition plan, you'll most likely be able to lock in a lower tuition rate, since many schools raise their prices every year.
If you have money left over in a 529 plan—say the beneficiary gets a substantial scholarship or decides not to go to college at all—you'll have several options. One is to change the beneficiary on the account to another relative, as financial advisor Jay Murray describes in the box above. Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school. If worse comes to worse, you can always cash in the account and pay the taxes and 10% penalty.