529 savings plans, legally known as "qualified tuition plans," are created under Section 529 of the federal income tax code, and are established by states to provide a way to invest to pay for qualified higher education expenses of the beneficiaries. There are two types of 529 plans: pre-paid tuition plans and savings plans. Most states and the District of Columbia offer 529 savings plans, but the features can vary from state to state.
Who Can Participate in 529 Plans?
Under federal tax law, an account in a state's 529 savings plan may be opened by any person on behalf of any individual, regardless of age, family relationship or whether the account owner or designated beneficiary is a resident of that state. Some states may, by state law or under their program rules, establish limitations on who may be an account owner or designated beneficiary.
Recognizing that the preferred use of a 529 account’s proceeds could change over time, the plans allow for a certain amount of flexibility. Once an account has been established for a designated beneficiary, the account owner is permitted to roll over the account to a new beneficiary who is a member of the family of the original beneficiary, subject to some limitations, without adverse tax consequences. States may have additional limitations on when or how the account owner or designated beneficiary may be changed. The account owner is permitted to roll over funds from one 529 savings plan account to another for the same beneficiary without adverse federal tax consequences, but no more frequently than once a year.
Federal tax law does not limit the ability of individuals to make contributions to an account established by another person, although some states may place limitations on who may be a contributor. There also may be federal or state tax consequences, so any individual considering a gift to a 529 savings plan account should consult a tax professional before making the contribution.
Learn About Specific Plans
Each 529 savings plan typically provides information in a program disclosure document (also referred to as the plan disclosure document) designed to assist investors in making a decision as to whether to invest in the plan and, if so, which investment options to select. This information also is designed to assist investors in understanding how the 529 savings plan operates and the risks of investing in the plan. Some program disclosure documents are required to be submitted to the MSRB’s Electronic Municipal Market Access (EMMA®) website. This requirement does not apply when state employees market their 529 savings plans directly to investors without the assistance of a broker-dealer. Virtually all plans provide information to the public through their websites.