529 Plan Regulations

The 529 plan was named after Section 529 of the IRS Tax Code.education equals earning potential image by Jan Beltz from Fotolia.com

A 529 plan is a college savings account named after Section 529 of the IRS Code. Established in 1996, 529 plans are operated by state colleges and universities and designed to allow tax-deferred and tax-free investment growth. Funds may be invested based on current tuition rates or left to grow for educational needs in the future.

Plan Structure

Each 529 plan is set up by the state through a financial management company. Parents may open the account in their name, with their child as a beneficiary. Account holders may elect to prepay for college tuition based on current education rates, or they may allow funds to grow and pay tuition based on future tuition costs. Money may be added by anyone and withdrawn at any time without penalty. Funds, however, are subject to state income taxes when withdrawn.

Beneficiaries are not permitted access to funds in their 529 plans until they are 18 years old, or 21 in some states. This was designed to allow parents to control investments and not lose them to students with impulsive, non-educational purchases on their minds. Adult students may open their own 529 plans; however, these are often subject to higher income taxes if they are not listed as dependents of parental income taxes.

Money invested in a 529 plan grows tax-deferred on the state level. When withdrawn, funds are subject to state income taxation. A portion of withdrawn funds, however, may be tax-deductible, depending on state tax and 529 regulations. Upon withdrawal, 529 investments are not taxed on the federal level if they are used for purposes relating to higher education.