A 529 plan is a college savings plan created to help people pay for their educational expenses by providing tax benefits and financial aids. Generally, a 529 plan is sponsored by states or educational institutions. And the plan is authorized by Section 529 of the Internal Revenue Code. 529 plans have two common types: college savings plans and prepaid tuition plans.
College savings plans
For college savings plans, the holder of the account contributes money to the savings plan as an investment in mutual funds or other similar investments. The 529 college savings plans provide account holders with various investment options. The performance of different investment options can affect the value of 529 plans.
The money contributed to the savings plan will be saved as the saver’s future qualified higher education expenses, including the tuition, mandatory fees, room and board, books and school supplies, computers, and other related costs. The withdrawals from the college savings plans normally can be used at any college or university, sometimes non-U.S. colleges and universities will also be included.
Besides, you can use the college savings plans for up to $10,000 in elementary or secondary school tuition, or you may use them to repay the student loans up to the same amount.
Prepaid tuition plans
The prepaid tuition plans, on the other hand, enable the account holder to purchase units or credits at certain colleges or universities (mainly public and in-state) for future tuition or other mandatory fees. The prepaid tuition plans are provided only by a limited number of states and certain higher education institutions.
The prepaid tuition plans can grow in value as time passes, and the money withdrawn from the accounts is not taxable.
However, unlike the savings plans, the prepaid tuition plans cannot be used for K-12 education. Neither can they be used for room and board.