| An Introduction to 529 Plans

Legislative Changes
Setting Every Community Up for Retirement Enhancement (SECURE) Act ( 2019 ) made some authoritative changes to 529 plans .

  • It allows 529 plan distributions of up to $10,000 to repay qualified student loans of the beneficiary. An additional $10,000 can be used for the qualified student loans of each of the beneficiary’s siblings. The $10,000 cap is a lifetime – not annual – limit.
  • It allows 529 plan distributions to pay for registered apprenticeship programs.

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors with background information on 529 plans. Please also see our companion Bulletin for a few questions to consider before opening a 529 plan account .
What is a 529 plan?

A 529 plan is a tax-advantaged savings design designed to encourage saving for future department of education costs. 529 plans, legally known as “ qualified tuition plans, ” are sponsored by states, country agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code .
There are two types of 529 plans : prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In summation, a group of private colleges and universities sponsor a postpaid tuition design .
What are the differences between prepaid tuition plans and education savings plans? 
Prepaid Tuition Plans. Prepaid tutelage plans let a saver or account holder buy units or credits at participating colleges and universities ( normally public and in-state ) for future tutelage and mandate fees at current prices for the beneficiary. Prepaid tutelage plans normally can not be used to pay for future room and circuit board at colleges and universities and do not allow you to prepay for tuition for elementary and junior-grade schools .

Most prepay tuition plans are sponsored by submit governments and have residency requirements for the saver and/or beneficiary. Prepaid plans are not guaranteed by the federal government. Some state governments guarantee the money paid into the postpaid tuition plans that they sponsor, but some do not. If your prepaid tuition payments aren ’ thymine guaranteed, you may lose some or all of your money in the plan if the plan ’ randomness sponsor has a fiscal deficit. In summation, if a benefactive role doesn ’ thyroxine attend a participating college or university, the prepay tuition plan may pay less than if the beneficiary attended a participating college or university. It may merely pay a belittled hark back on the original investment .

Education Savings Plans. Education savings plans let a rescuer open an investment account to save for the benefactive role ’ south future qualified higher education expenses – tuition, mandatary fees and room and board. Withdrawals from education savings plan accounts can by and large be used at any college or university, including sometimes at non-U.S. colleges and universities. Education savings plans can besides be used to pay up to $ 10,000 per year per beneficiary for tuition at any public, private or religious elementary or secondary school .

A saver may typically choose among a range of investing portfolio options, which often include respective common store and exchange-traded fund ( ETF ) portfolios and a principal-protected bank product. These portfolios besides may include electrostatic fund portfolios and age-based portfolios ( sometimes called target-date portfolios ). typically age-based portfolios mechanically shift toward more conservative investments as the beneficiary gets closer to college long time. If you are using a 529 explanation to pay for elementary or secondary school tutelage, you may have a shorter time horizon for your money to grow. You besides may not feel comfortable taking on riskier or more volatile investments if you plan on withdrawing the money soon. Because of these things, you may consider unlike investment options depending on when you plan to use the money that is invested .

All department of education savings plans are sponsored by state governments, but entirely a few have residency requirements for the rescuer and/or benefactive role. State governments do not guarantee investments in education savings plans. education savings design investments in common funds and ETFs are not federally guaranteed, but investments in some principal-protected bank products may be insured by the FDIC. As with most investments, investments in department of education savings plans may not make any money and could lose some or all of the money invested .

What fees and expenses will I pay if I invest in a 529 plan? 
It is important to understand the fees and expenses associated with 529 plans because they lower your returns. Fees and expenses will vary based on the type of 529 design ( education savings plan or prepay tuition plan ), whether it is a broker- or direct-sold plan, the plan itself and the underlying investments. You should carefully review the design ’ s offering round to understand what fees are charged for the plan and each investing option .

Prepaid Tuition Plans. Prepaid tutelage plans may charge an enrollment/application fee and ongoing administrative fees .

Education Savings Plans. Education savings plans may charge an enrollment/application fee, annual report maintenance fees, ongoing program management fees, and ongoing asset management fees. Some of these fees are collected by the state presenter of the plan and some are collected by the plan director. The asset management fees will depend on the investment choice you select. Investors that leverage an education savings plan from a broker are typically topic to extra fees, such as sales loads or charges at the clock of investment or redemption and ongoing distribution fees .

Fee Saving Tips. many states offer direct-sold education savings plans in which savers can invest without paying extra broker-charged fees. In accession, some education savings plans will waive or reduce the administrative or care fees if you maintain a large account balance, participate in an automatic contribution plan, or are a nonmigratory of the state of matter sponsoring the 529 plan. Some 529 plans besides offer fee waivers if the rescuer accepts electronic-only pitch of documents or enrolls online .

How does investing in a 529 plan affect federal and state income taxes? 
Investing in a 529 plan may offer savers particular tax benefits. These benefits vary depending on the department of state and the 529 plan. In addition, country and federal laws that affect 529 plans could change. You should make sure you understand the tax implications of investing in a 529 plan and consider whether to consult a tax adviser .

Contributions. many states offer tax benefits for contributions to a 529 plan. These benefits may include deducting contributions from department of state income tax or coordinated grants but may have respective restrictions or requirements. In addition, savers may only be eligible for these benefits if you invest in a 529 design sponsored by your state of mansion .

Withdrawals. If you use 529 account withdrawals for qualify higher education expenses or tuition for elementary or secondary schools, earnings in the 529 account are not subject to federal income tax and, in many cases, state income tax. however, if 529 report withdrawals are not used for qualify higher education expenses or tuition for elementary or secondary schools, they will be subject to state and federal income taxes and an extra 10 % federal tax penalty on earnings .

One of the benefits of 529 plans is the tax-exempt earnings that grow over a period of time. The longer your money is invested, the more time it has to grow and the greater your tax benefits. You will lose some of these likely benefits if you withdraw money from a 529 design history within a unretentive period of time after it is contributed .

What restrictions apply to an investment in a 529 plan?
There will likely be restrictions on any 529 plan you may be considering. Before you invest in a 529 plan, you should read the design ’ s offering circular to make indisputable that you understand and are comfortable with any design restrictions .

Investments. Education savings plans have certain pre-set investment options. It is not permitted to switch freely among the options. Under current tax law, an bill holder is alone permit to change his or her investment option twice per year or when there is a exchange in the benefactive role .

Withdrawals. With limited exceptions, you can entirely withdraw money that you invest in an education savings plan for qualify higher education expenses or tutelage for elementary or secondary schools without incurring taxes and penalties. Beneficiaries of prepay tutelage plans may only use their buy credits or units at participating colleges or universities. If a beneficiary doesn ’ metric ton attend a participating college or university, the prepay tuition design may pay less than if the benefactive role attended a participating college or university. It may merely pay a small return on the original investment .

Does investing in a 529 plan impact financial aid eligibility?
While each educational institution may treat assets held in a 529 account differently, investing in a 529 design will by and large impact a scholar ’ south eligibility to receive need-based fiscal help for college. You may besides need to consider how having money in your 529 account for future qualified higher department of education expenses might affect fiscal aid for your student ’ randomness elementary or secondary coil school tutelage. For many families, the larger part of a fiscal aid package may be in loans. sol, the more you can save for school, the less debt you or your student may have to incur .

Where can I find more information? 

Offering Circulars for 529 Plans. You can find out more about a particular 529 design by reading its offer round. The National Association of State Treasurers created the College Savings Plan Network ( radio link is external ), which provides links to most 529 plan websites .

529 Expense Analyzer. 529 education savings plans have fees and expenses that can vary widely from plan to plan. The Financial Industry Regulatory Authority ( FINRA ) has developed a cock to help you compare how these fees and expenses can reduce returns.

Underlying Mutual Funds or Exchange-Traded Funds. extra data about a common fund or ETF that is an investing option in an education savings design is available in its prospectus, argument of extra information, and semiannual and annual stockholder reports. You can obtain these documents from the plan director for no charge. You can besides review these documents on the SEC ’ s EDGAR database .

Fees and Expenses. You can read about the impact fees and expenses have on your investment portfolios in the SEC ’ second Office of Investor Education and Advocacy ’ s Investor Bulletin : How Fees and Expenses Affect Your investment portfolio .

Brokers or Investment Advisers. many department of education savings plans ’ course of study managers are registered investment advisers. You can search for an investment adviser and view its Form ADV on You can besides search for any disciplinary sanctions against a broker who may sell a 529 savings design intersection, ampere well as information about his or her master backdrop and registration and license status, on .

Financial Aid. You can read more about federal fiscal aid at the U.S. Department of Education ’ s Federal Student Aid web site .

Other Online Resources. You can learn more about 529 plans and other education saving options on FINRA ’ s Saving for College web site ( connect is external ). The web site contains links to other sites, including the College Savings Plan Network ( radio link is external ) and the Internal Revenue Service ’ s Publication 970 ( Tax Benefits for Higher Education ). You can besides find educational information about 529 plans on the Municipal Securities Rulemaking Board ’ s education center web site .

The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities or tax law.

Related Posts