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A 529 Plan is a tax-advantaged savings plan designed to encourage saving for future education costs. It is named after Section 529 of the Internal Revenue Code and is sponsored by states, state agencies, or educational institutions. There are two types of 529 Plans: prepaid tuition plans and education savings plans.
Examples:
- Prepaid Tuition Plan: Allows families to purchase tuition Credits at today’s rates for future use at in-state public colleges and universities.
- Education Savings Plan: Allows families to open an investment account to save for a range of education-related expenses, including tuition, room and board, and supplies.
Cases:
- A family contributes to a 529 Plan for their child’s college education, and the funds grow tax-free. When the child enrolls in college, the family can withdraw the Money without incurring federal taxes on the earnings, provided the funds are used for qualified expenses.
- A grandparent opens a 529 Plan for their grandchild. When the grandchild is ready for college, the grandparent can withdraw the funds to cover tuition and fees, taking advantage of tax benefits.