Qualified Tuition Programs (529 Plans)

States and institutions of higher education may establish Qualified Tuition Plans (commonly known as 529 plans after the section of the tax code in which they were authorized). The plans are structured like Roth IRAs. Contributions to such accounts can be made by taxpayers of all income levels and in any amount. Unlike CESAs and IRAs, however, neither the contributor nor the beneficiary retains direct control over the investments. Instead, investment control is exercised by the entity that established the plan.

Earnings accrue within the account tax-free, and withdrawals are not taxed as long as they do not exceed qualified education expenses. Such expenses include tuition, fees, books, supplies, and equipment for higher education. Room and board also qualify as long as the beneficiary is enrolled at least half-time. Qualified expenses are reduced, however, by tax-exempt scholarship and fellowship amounts as well as by any amount used to calculate either the Hope or lifetime learning credit. Unused amounts can be rolled over into the account of another family member.