What Is a 529 Education Plan?

A 529 education plan is a type of plan that allows families to save money for a child's future college education. This type of plan could come in the form of a prepaid tuition plan or a college savings plan.

This type of plan comes with some unique tax benefits. The amount of money that you contribute is contributed on an after-tax basis like a Roth IRA. Then, you can invest money into many different types of investments such as mutual funds and stocks. The money that is earned from these investments is allowed to accrue on a tax-free basis. Then, when your child needs to take out the money for qualified education expenses, they are not charged any type of taxes on it. 

With this type of plan, each state has a different maximum contribution limit that you can make. This type of plan allows for contribution limits in excess of $200,000. This is much more than the comparable Coverdell savings plan which only allows a maximum of $2000. 

Depending on which state you live in, you might also be able to get certain state tax benefits as well. If you are purchasing a prepaid tuition plan, it may also be guaranteed by the state.

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