529 Plans: Introduction

By Denise Appleby

529 plans (also known as a "qualified tuition program") were created under the Small Business Job Protection Act of 1996 (SBA '96) as a means of allowing taxpayers to save for higher education expenses for a designated beneficiary. A 529 plan may be provided by a state, an agency of the state or by an educational institution.

Like the education savings account (ESA), the 529 plan is an excellent way to save for education expenses. Earnings accumulate on a tax-deferred basis and distributions that are used for qualified education expenses are tax- and penalty-free. Unlike the ESA, the 529 plan may be set up in a way that allows individuals to prepay a student's qualified higher-education expenses at an eligible educational institution. Also, the contribution limits for a 529 plan are considerably higher than those for an ESA. Here we take a look at 529 plans, how they work and how you can use them to save for a child or grand-child's college education.