A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. These plans, named after Section 529 of the Internal Revenue Code, are sponsored by states, state agencies, or educational institutions. There are two main types of 529 plans: prepaid tuition plans and education savings plans.

1. **Prepaid Tuition Plans:**
– These plans allow you to prepay tuition at eligible colleges and universities at today’s prices. Essentially, you are purchasing future tuition credits or units at current prices, and the value of these credits typically increases with the cost of tuition.
– Prepaid tuition plans are often sponsored by state governments and have residency requirements. They may cover tuition and fees but may not cover other expenses like room and board.

2. **Education Savings Plans:**
– Education savings plans operate as investment accounts, allowing you to contribute money to the account, which is then invested in a variety of investment options. The value of the account can fluctuate based on the performance of the chosen investments.
– Funds from education savings plans can be used for qualified education expenses, including tuition, fees, room and board, books, and other related costs at eligible colleges, universities, and vocational schools.

Key features and benefits of 529 plans include:

– **Tax Advantages:** Contributions to 529 plans are not deductible on your federal tax return, but the earnings in the account grow tax-deferred. Withdrawals used for qualified education expenses are generally tax-free at the federal level.

– **Flexible Beneficiary Designation:** If the original beneficiary (the person for whom the account was established) decides not to pursue higher education, you can typically change the beneficiary to another eligible family member without tax consequences.

– **High Contribution Limits:** While contributions are not federally tax-deductible, many states allow for relatively high contribution limits, and there are no income restrictions for contributors.

– **Wide Range of Eligible Institutions:** Funds from 529 plans can be used at eligible educational institutions nationwide, not just in the state where the plan is sponsored.

It’s important to note that non-qualified withdrawals from a 529 plan may be subject to federal income tax and a 10% penalty on earnings. Additionally, the specific features and rules of 529 plans can vary between states, so it’s advisable to carefully review the details of the plan you choose.