What is a 529 plan?
A 529 plan is an education savings plan operated by a state or an educational institution and designed to help families set aside funds for college. It is named after Section 529 of the Internal Revenue Code, which authorized these types of tax-advantaged savings plans in 1998.
529 plans offer unsurpassed income tax breaks. Although your contributions are not deductible on your federal tax return, your investment’s earnings are tax-deferred; your withdrawals for “qualified higher education expenses” are free from federal income taxes; and your savings can be used at thousands of accredited colleges and vocational schools across the country. (Unqualified withdrawals may be taxable as ordinary income and subject to a 10% federal tax penalty.) The Pension Protection Act of 2006 made the tax-free character of 529s a permanent part of federal law.
Everyone can take advantage of a 529 plan, and the amounts you can invest are substantial (more than $300,000 per beneficiary in many state plans). Generally, the plan has no income limitations or age restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan for yourself!
Texas offers two types of 529 plans: a prepaid tuition plan and a savings plan.
- Prepaid tuition plans let you prepay all or part of the tuition costs for a two-year or four-year degree at an in-state public college or university. They can also be used at private and out-of-state colleges.
- Savings plans work much like a 401K or IRA, by investing your contributions in mutual funds or similar investments. The plan offers several investment options. Your account will go up or down in value based on the performance of the particular option you select.
This hypothetical illustration assumes an initial investment of $10,000 and an 8 percent annual rate of return. The taxable account assumes a 28 percent federal tax rate. The illustration does not represent the performance of any specific account or investment and does not reflect any plan fees or charges that may apply. If such fees or charges were taken into account, returns would have been lower.
