What Is A 529 Plan?

A 529 plan provides a tax-advantaged safe haven for parents and other loved ones to begin setting aside cash to pay for a child's future educational expenses. It's a gigantic asset standing in the corner of savers and planners across the United States. Fortunately, anyone can use the tax benefits of a 529 plan to set money aside for future needs. Moreover, recent expansions have made the funds built up in a 529 plan more accessible across the spectrum of education, leading to an even more enriching savings program for young people.

Establishment of 529 plans, officially known as "qualified tuition plans," can be made through state programs or private channels. Even with a laundry list of important details circulating around the use of these education savings tools, the bare bones of the program is quite easy to digest and understand. Any U.S. resident with a Social Security number or Tax ID can open a 529 plan, and they can make anyone (who is equally taxpayer-identified) a beneficiary. Account owners can change beneficiaries in the event that one child no longer needs the educational funding, or even open an account in their own name to pay for future educational expenses. Investing in a loved one's future is a smart thing that anyone can do with their money, and it is a great way to set someone up for success.

There are two primary types of 529 plans

People looking to set aside capital to pay for college can generally do so through one of two 529 funding options: a prepaid tuition plan or an education savings plan. Education savings plans offer greater flexibility, acting as a kind of investment account that can be drawn down on later. Savers will typically deposit money into this account, then begin to purchase ETFs and other funds through the account to grow its value over time. As is the case with any compound interest investment, the longer you allow the money to work for you, the less principal will be required to hit your target value.

A prepaid tuition plan, meanwhile, takes a different approach. Rather than building a cash reserve that can be used to pay for educational expenses in the future, prepaid plans allow savers to purchase a kind of "tuition unit" in advance. An undergraduate degree typically consists of 120 credits, and prepaid savers can pay into their account to arrive at a total banked value of this (or another) credit value. The plan then kicks into action each semester when the beneficiary enrolls in their college courses and gets their bill for the term.

Legislation in 2017, 2019, and 2022

Not only can funds from a 529 plan be leveraged to manage the cost of collegiate education, but recent legislation has opened these savings strategies up to a wider berth of use cases. Expansion in 2017 saw the application of these funds for K-12 education come into the fold, and in 2019, those looking for apprenticeships could tap into their 529 funding for financial support. The definition of "qualified education expense" has been broadened to include a range of educational services for a more inclusive field of learning opportunities. This makes use of a 529 plan far more enticing for parents hoping to set money aside for children with a truly diverse set of interests.

Perhaps even more importantly, SECURE Act and SECURE Act 2.0, signed into law in 2019 and 2022, respectively, have established even greater utilization leeway. Beneficiaries of 529 savings can now utilize this money in a conversion to Roth IRA retirement savings, or even as a tool to pay off their student loans. Although, it's likely a good idea to consider holding off on aggressive student loan repayment for many people who have made their way through the collegiate system.