529 plan

A 529 plan is an education savings vehicle named for Section 529 of the Internal Revenue Code and sponsored by states. An adult — often a parent or grandparent — opens the account for a beneficiary, contributes after-tax dollars, and invests them in the plan's menu of portfolios. Earnings grow tax-deferred, and withdrawals escape federal tax entirely when spent on qualified education expenses such as college tuition, fees, room and board, and, within limits, K-12 tuition.

529 plans come in two forms. Savings plans work like investment accounts, with returns tied to market performance. Prepaid tuition plans let contributors lock in tuition credits at participating schools at today's prices. Contribution limits are set by each state and are far higher than those of Coverdell ESAs. Contributions are treated as gifts for tax purposes, and 529 plans allow a special election to front-load several years' worth of gift-tax exclusions in a single contribution.

Control is a distinguishing feature: the account owner — not the beneficiary — decides how money is invested and when it's withdrawn, and the owner can change the beneficiary to another family member. Withdrawals not used for qualified expenses incur income tax plus a penalty on the earnings portion. Many states sweeten the deal with a state income tax deduction or credit for contributions to their own plan.

Because 529 plans are legally municipal fund securities, they're sold by prospectus-like official statements and regulated by the MSRB — a detail exam writers love. The SIE, Series 6, and Series 7 exams all test 529 plans alongside Coverdell ESAs and ABLE accounts, focusing on tax treatment, owner control, and suitability.