529 Plan Tutorial

529 plans (also known as "qualified tuition programs") were created under the Small Business Job Protection Act of 1996 (SBA '96) to allow taxpayers a tax-advantaged way to save for higher education expenses for a designated beneficiary. A 529 plan may be provided by a state, an agency of the state or by an educational institution.

Like the Coverdell education savings account (ESA), the 529 plan is designed for education expenses. Contributions are made with after-tax dollars. Earnings accumulate on a tax-deferred basis and distributions that are used for qualified education expenses are tax- and penalty-free. Unlike the Coverdell ESA, the 529 plan may also be set up in a way that allows individuals to prepay a student's qualified higher-education expenses at an eligible educational institution. Also, the contribution limits for a 529 plan are considerably higher than those for an Coverdell ESA (contributions to all Coverdells for a specific beneficiary are limited to $2,000 per year). What's more, Coverdells also have income restrictions for contributors (less than $110,00 if the contributor files as a single; $220,000 if they file joint returns).

On the other hand, a Coverdell can be used for educational expenses for grades K through 12, not just for college expenses.  

Here we take a look at 529 plans, how they work and how you can use them to save for a child or grandchild's college education.