What Is a 529 Plan?

Formally known as a qualified tuition program or QTP, a 529 plan is a tax-advantaged way to save money for college. The "529" refers to the section of the IRS tax code that authorized the plans back in 1996.

While you don’t get a federal income-tax deduction for your contributions to the plan, they may be deductible on your state tax return if you invest in the plan run by the state you live in.

What's more, the earnings on your account will not be taxed by the federal government, or by many states, as long as you use the money to pay qualified educational expenses. Those generally include tuition, mandatory fees, room and board, and required books.

You can set up a 529 plan and name anyone (including yourself) as the beneficiary. Typically, however, a child will be the beneficiary, with a parent serving as custodian. You can change the beneficiary to another family member if, for example, your child is lucky enough to graduate with money still left in the account.

States may offer two types of 529 programs: savings plans and prepaid tuition plans, which lock in tuition costs based on current rates. Educational institutions can also offer their own prepaid plans.

You can find details about your state’s 529 plan or plans (though you are free to invest with another state) at the College Savings Plans Network or Savingforcollege.com.

Other 529-related information, such as contribution limits, is available on the websites of the Internal Revenue Service and U.S. Securities and Exchange Commission.