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What are college savings plans?

A college savings plan is often referred to as a 529 plan after the IRS code. It is a college savings plan that offers tax and financial aid benefits.

You can invest in almost any state 529 plan, not just your own state’s 529 plan.

529 plans may also be used to save and invest for K-12 tuition in addition to college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan. There is also a 529 plan operated by a group of private colleges and universities.

529 Savings Plans

The IRS defines “a 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.”

It’s a financially smart way of saving money for college. Because of the tax advantages, there are limits and rules you must follow. 

The Tax-Advantages of College Savings Plans

College Savings Plans work much like a Roth IRA by investing your after-tax contributions in mutual funds or similar investments. The 529 college savings plan offers several investment options from which to choose and can go up or down in value based on the performance of the investments.

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