529 Plan
EducationGlossary term
Definition
A tax-advantaged savings plan designed to help families save for future education expenses, sponsored by states, state agencies, or educational institutions. Contributions grow tax-free, and withdrawals are also tax-free when used for qualified education expenses like tuition, books, and room and board. Many states also offer a state income tax deduction or credit for contributions to their 529 plan.
Related terms
- Coverdell ESAA tax-advantaged savings account that allows families to contribute up to $2,000 per year per beneficiary to cover qualified education expenses from kindergarten through college. Like a 529 plan, earnings grow tax-free and withdrawals are tax-free when used for eligible expenses. Coverdell ESAs offer more investment flexibility than 529 plans but have lower contribution limits and income restrictions for contributors.
- Prepaid Tuition PlanA type of 529 plan that allows you to purchase credits at participating colleges and universities at today's prices, effectively locking in the cost of tuition against future increases. These plans are typically sponsored by state governments and may be limited to in-state public institutions. Prepaid tuition plans provide peace of mind against tuition inflation but may offer less flexibility than 529 savings plans if your child attends a different school.
- TuitionThe amount of money charged by a school for instruction and academic services, which varies widely between public and private institutions and between in-state and out-of-state students at public colleges. Tuition is typically the largest component of the cost of attendance and has been rising faster than inflation for decades. Financial aid, scholarships, and 529 plans can all be used to help cover tuition costs.
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