DEFINITION of '529 Prepaid Tuition Plan'

A tax-advantaged method for paying future college tuition costs at current prices. 529 prepaid tuition plans are authorized by Section 529 of the Internal Revenue Code and allow the account holder to purchase tuition credits at their present price even though they will not be used until a future year, when tuition costs will have most likely increased. Plans are state sponsored and only available in some states, but it is possible to participate in a prepaid tuition plan outside of the account holder's current state of residence.

BREAKING DOWN '529 Prepaid Tuition Plan'

If the child who is the account beneficiary dies, decides not to attend college, decides to attend college in a state other than the one in which the plan was established or decides to attend a private college, prepaid tuition credits may be transferred to another child, contributions may be withdrawn, or the in-state value of the prepaid credits may be transferred to an out-of-state or private institution. Parents, relatives and friends are all allowed to contribute to the child's account, which can be especially helpful to grandparents who want to give money to their grandchildren in a tax-friendly way.

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