DEFINITION of '529 Savings Plan'

A tax-advantaged method of saving for future college expenses that is authorized by Section 529 of the Internal Revenue Code. The plan allows an account holder to establish a college savings account for a beneficiary and use the money to pay for tuition, room and board, mandatory fees and required books and computers. The money contributed to the account can be invested in stock or bond mutual funds or in money market funds, and the earnings are not subject to federal tax (or state tax, in most cases) as long as the money is used only for qualified college expenses. The plans are open to both adults and children.

BREAKING DOWN '529 Savings Plan'

States have their own 529 savings plans with unique features. An individual can open a 529 plan in any state, and the plan does not have to be in the account holder's or beneficiary's state of residence.

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