A “529 Plan” is a tax-exempt way to save for college. The name “529” comes from the section in the IRS tax code that covers the details of the plan.
Here are the basics:
Colleges, state offices, banks, and other financial institutions can help to open a 529 account for you. Simply put, you make contributions to the account, which you use for eligible college expenses, and you need not pay federal taxes on the money earned in that account.
There are two variations of plans, but not all states carry them both.
One type, available in most states, is more or less a straight savings plan, with tax benefits.
The other plan locks in the current tuition at a selected college, and prepays that tuition as the account builds with deposits. Any rise in tuition over the years will not affect such a plan. A family may open a plan well before the student is in college or even high school, which will insure that they avoid tuition increases and that they know just how much the college tuition for that student will cost them. Please note - not all states have this type of plan available. Check with your state to determine.
The specific details of 529 Plans may vary from state to state – for example, which colleges are eligible, and exactly which tax benefits are connected, and which particular college expenses may be involved, such as tuition, books, computers, and room and board.