According to the SEC , 529 plans are tax advantaged education plans, legally called “qualified tuition plans,” designed to spur people into saving for future education costs, i.e. kids (don’t read anymore into that!). Sponsored by government agencies, they’re authorized by Section 529 of the Internal Revenue Code, hence their name. The 529 plans come in two varieties – a pre-paid tuition plan and a college savings plan. Prepaid tuition plans are exactly what they sound like, they let you prepay tuition or credits at participant colleges. The college savings plans are a little broader and are essentially plans where the saver can save and invest money for a future student beneficiary, independent of which school they go to. The trade off is of school choice and the ability to lock in tuition in today’s rates, with the savings plan you get choice but not rate lock and with the prepaid plan you get rate lock but limited choices.
The tax benefits of participating in a 529 plan are decent but not incredible. Earnings are not federally taxed and usually not state taxed if you use it for education purposes; if you don’t, they are taxed at your marginal rate plus a 10% penalty (the standard penalty for these types of things). The states themselves may also add in a financial incentive to participate such as grants or matching funds but many of them only do that if you use their state’s 529 plan.
In Maryland, the two different plans are called the The Maryland Prepaid College Trust and the Maryland College Investment Plan. The Prepaid College Trust is the pre-paid tuition plan and the College Investment Plan is the college savings plan, each are managed by T. Rowe Price, more on those two plans in a later article.
No one read anything into this… just looking ahead. 🙂