A 529 plan is a type of savings plan designed to encourage saving for future education expenses. The plans are named after the section of the Internal Revenue Service code that created them.
These plans are tax-advantaged, meaning that investment gains in the plans are not taxed and distributions from 529 accounts used for so-called “qualified education expenses” are exempt from tax. In addition, many states provide deductions from state income tax for some or all of contributions.
Broadly speaking, the plans are available in two types, prepaid and savings. Prepaid plans allow investors to purchase tuition credits at today's rates to be used in the future. Savings plans are investment accounts that allow the saver to use the money to pay for tuition and other expenses at a later date.
Prepaid plans are usually restricted to a certain state or college. These plans are essentially just paying tuition in advance. Given way tuition costs have been rising recently, these accounts could prove to be an excellent investment, but these plans are more limited in terms of where the credits can be used, and also which expenses can be paid for from the plan. Prepaid plans are also usually guaranteed by the state that administers the account.