529 college savings plans (also known as Qualified Tuition Programs) are state- sponsored investment accounts designed to help families and individuals pay for qualified tuition expenses.
The accumulated contributions - and any account growth - can be used at most accredited colleges and universities in the United States and at many colleges abroad.
Most states offer a college savings plan, although the different plans can vary in important respects, such as fees or state specific tax benefits. You are not required to use your home state’s 529 plan. You can compare and select whichever state 529 plan you prefer. However, you should carefully review your home state plan to see if it offers benefits that are only available if you invest in that plan.
Any earnings in your 529 account have the opportunity to grow tax free and withdrawals are federal income tax free, provided the money is used for qualified educational expenses such as tuition, fees, books, supplies and eligible room and board costs. Note, however, that any funds withdrawn for nonqualified purposes are subject to federal and state income tax and an additional 10% federal penalty tax.
With 529 plan accounts, the account holder selects the investment option for the account, retains control of the funds, and can decide when to take withdrawals. Also, 529 plan account owners can change the investment option every calendar year. You may also roll over your account to a different 529 plan program, as long as no such rollover for the account’s beneficiary has occurred in the previous 12 months. (Consult with your tax advisor before switching to or rolling over into another 529 plan.)
Anyone can open a 529 college savings account, and it’s easy to do. Once you’ve selected a state plan, reviewed the disclosure booklet, and completed the necessary paperwork, you make your initial contribution; typically, you can also choose to make automatic deposits into your account. Because 529 plan programs provide preset portfolios, you do not have to decide how to invest the money you contribute - the plan’s assets are professionally managed either by an investment company hired by the state, or by the state treasurer’s office.
If you think a 529 plan might be a good option for your college savings goal, note that fees and expenses can vary considerably from plan to plan. The investment options also differ among plans. Be aware that advisor-sold plans - in which you select a plan based on the advice you receive from an investment advisor or brokerage firm - generally cost more than direct-sold plans, in which you choose a plan directly from a financial services company acting on behalf of the state sponsoring the plan. (AARP College Savings Solutions from TIAA contains information about direct-sold plans only. As such, broker-related sales charges do not apply.)