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What is a 529 Plan?

May 24, 2012

If you are already saving for college, you have probably looked into 529 plans. 529 plans are revolutionizing the way parents and grandparents save for college, similar to the method 401(k) programs inspired retirement savings. Americans are putting billions of dollars into 529 plans, and contributions are expected to grow dramatically in the coming decade. Where did these plans come from, and what makes them so appealing?

The history of 529 plans

Congress created Section 529 plans in 1996 in a piece of legislation that had little to do with saving for college–the Small Business Job Protection Act. The law on 529 plans was later refined in 1997 by the Taxpayer Relief Act, in 2001 by the Economic Growth and Tax Relief Reconciliation Act, and in 2006 by the Pension Protection Act. In this short period, 529 plans have been seen as one of the best ways to save for college.

Section 529 plans are officially known as qualified tuition programs under federal law. The reason “529 plan” is commonly used is because 529 is the section of the Internal Revenue Code that governs their operation.

What exactly is a 529 plan?

A 529 plan is a college savings vehicle that has federal tax advantages. There are two types of 529 plans: college savings plans and prepaid tuition plans. Though college savings plans and prepaid tuition plans share the same federal tax advantages, there are important differences between them.

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