Qualified Tuition Program (529 Plan)
Also known as a 529 Plan, a qualified tuition program is a tax-advantaged plan that allows an individual to make early deposits into an account that is established for the use of higher education expenses at eligible institutions. The assets within the account must not be higher than the cost of these expenses.
Although no limits are placed on contribution amounts in a 529 Plan, the contributor must be careful to not exceed the amount that covers educational expenses. There are two types of 529 plans: prepaid and savings. Prepaid plans allow one to purchase tuition credits at today’s rates to be used in the future. Therefore, performance is based upon tuition inflation. Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. Most 529 savings plans offer a variety of age-based asset allocation options in which the underlying investments become more conservative as the beneficiary gets closer to college age.