529 plan

A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary.

529 plans are named after section 529 of the Internal Revenue Code 26 U.S.C. § 529. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors and exemption from state financial aid calculations for investors who invest in 529 plans in their state of residence.

There are two types of 529 plans, prepaid plans and savings plans.

With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages. Qualified distributions from 529 plans for qualified higher education expenses are exempt from federal income tax.

Legislation introduced in the U.S. House of Representatives in 2011 by Congresswoman Lynn Jenkins, (R-KS) and Congressman Ron Kind, (D-WI) that would include 529 plan contributions in the SAVERs tax credit, make permanent the inclusion of computers as a qualified expense, provide for four annual investment direction changes and provide employers with an incentive to contribute to the 529 plans of their employees.

529 college savings plan originated from states rather than the federal government. With tuition cost increasing year by year, the state-run prepaid tuition program of Michigan addressed the increasing anxiety on the part of many thousands of Michigan households with the Michigan Education Trust (MET) proposition. This created a fund to which the state's residents could pay a fixed amount in exchange for a promise that this state Trust would pay future tuition for a named beneficiary at any Michigan public college or university.

This provided an opportunity to prepay future tuition, which would not to be affected by future tuition increases. The initiative sparked interest in other states, which launched their first prepaid tuition program.

Michigan delayed its own launch so that a ruling could be requested from the Internal Revenue Service (IRS) regarding the tax aspect of arrangement. The IRS allowed purchasers of the "prepaid tuition contract" to not be taxed on the accruing value of the contract until the year in which funds were distributed or refunded. Additionally, the trust fund established by the state of Michigan was required to receive prepayments and be subject to income tax on earnings from the invested funds.

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Wikipedia