529 COLLEGE SAVINGS PLANS

529 college savings plans are established by states under Internal Revenue Code (IRC) Section 529(b)(1)(A)(ii) as qualified tuition programs through which individuals may accumulate funds for certain qualified higher education expenses of beneficiaries. Individuals purchase interests in a trust or other financial arrangement established by the state or its instrumentality, with the collective assets invested according to the planís stated investment objectives.

States typically engage investment management firms, such as mutual fund companies, to manage the investment of assets.  The investment options are subject to market risk. Your investment may make no profit or even decline in value.

Investors may open an account through an authorized investment firm (referred to as an broker-sold plan) or directly with the 529 plan (a direct-sold plan), either through the 529 plans primary distributor or directly with state personnel. Fees and charges may be lower in a direct-sold plan, but an investor may not have access to an investment professional, as with an broker-sold plan. 

Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board.

However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. Many states offer state income tax or other benefits, such as matching grants, for investing in a 529 plan. But you may only be eligible for these benefits if you participate in a 529 plan sponsored by your state of residence. Just a few states allow residents to deduct contributions to any 529 plan from state income tax returns.

If you receive state tax benefits for investing in a 529 plan, make sure you review your planís offering circular before you complete a transaction, such as rolling money out of your home stateís plan into another stateís plan. Some transactions may have state tax consequences for residents of certain states.