What Are 529 College Savings Plans?
529 college savings plans are established by states for the purpose of providing a program for individuals wishing to invest to pay for qualified higher education expenses of a beneficiary. Usually but not always structured similar to a mutual fund or fund of funds, 529 college savings plans are offered by virtually every state.
529 college savings plans, so-called because they are established under Section
529 of the federal income tax code, are created and maintained by states or their
instrumentalities. The state or instrumentality (not the mutual fund family associated with the plan)
is the issuer of any shares or interests purchased by customers. Most states and
the District of Columbia have 529 college savings plans. Although these plans share
certain basic elements required under federal tax law, features can vary from state
to state. Such features include state tax law treatment, who may invest in a plan
and the types of investment options available, among many others.
Investments in 529 college savings plans involve investment risks. Although plans
are established by states, the states do not provide guarantees against
investment loss, except in certain very limited cases. As with any securities investment,
an investment in a 529 college savings plan can decrease in value. Also, although past
performance of available investment options in a 529 college savings plan may be one of
several appropriate factors to consider in choosing an investment, past performance is
not necessarily indicative of how a particular investment vehicle will perform in the future.
Application of Federal Securities Laws
Although most 529 college savings plans have been modeled after mutual funds or
"funds of funds", they are not regulated like mutual funds under the Investment
Company Act. In particular, in structuring a 529 college savings plan, the governmental
issuer is not required to meet the basic requirements in that statute. Requirements
from which 529 college savings plans are exempted include, among other things, registration
with the Securities and Exchange Commission, preparation of a prospectus and statement
of additional information (SAI), daily calculation of net asset value, and establishment
of a board of directors that includes independent directors. Broker-dealers that
market 529 college savings plans are also exempt from the Investment Company Act,
but they must fully comply with MSRB rules. MSRB rules provide important protections
to the investing public by establishing standards of fair practice, disclosure, suitability
and professional qualifications for broker-dealers.
Account Owners, Designated Beneficiaries and Rollovers
Under federal tax law, an account in a state's 529 college savings plan may be opened
by any person ("account owner") for any individual ("designated beneficiary"), regardless
of age, family relationship or whether the account owner or designated beneficiary
is a resident of that state. Once an account has been established for a designated
beneficiary, the account owner is permitted to effect a rollover to change the beneficiary
without impacting the federal tax benefits, but only to a member of the family
of the original beneficiary and subject to other limitations. The account owner is
also permitted to effect a rollover from one 529 college savings plan to another
for the same beneficiary without adverse federal tax consequences, but no more frequently
than once a year. Federal tax law does not limit the ability of individuals
to make contributions to an account established by another person, although some
states may, by state law or under their program rules, establish limitations on
who may be an account owner, contributor or designated beneficiary or on when or
how the account owner or designated beneficiary may be changed. There also may be federal
or state tax consequences so any individual considering a gift to a 529 college savings
plan account should consult a tax professional before making the contribution.
Selection of Investments
As a general matter, federal tax law permits the account owner to select the
investment options in which contributions to a specific account will be made only when
the account is initially opened. This selection will be among the various investment
options made available by a particular state in its 529 college savings plan. Each
state may provide a range of investment options, and the investment options may
vary greatly from state to state. The Internal Revenue Service permits, without
imperiling the federal tax advantage, an account owner to change investment options
no more frequently than once a year and at any time upon a rollover to a new designated
beneficiary. Customers are not limited to investing in the 529 college savings plan in
the customer's state of residence or the state in which the designated beneficiary will
attend college. However, certain state tax and other benefits may only be available
for residents of that state.
Each 529 college savings plan typically provides information designed to assist
investors in making a decision as to whether to invest in the plan and to choose
among the available investment options within the plan. This information also is
designed to assist investors in understanding how the 529 college savings plan operates.
Virtually all plans provide information to the public through their websites. In addition,
for plans where a broker-dealer has been engaged as a primary distributor, such
broker-dealer must receive from the issuer a copy of an official statement (usually
referred to as a plan disclosure document, program description or disclosure statement)
that includes, among other things, information concerning the plan, account opening
procedures, fees and expenses, tax consequences and investment options. This requirement
does not apply when state employees market their 529 college savings plans directly to
investors without the assistance of a broker-dealer. If a broker-dealer sells interests in
a 529 college savings plan, it generally is obligated under MSRB rules to provide a copy
of the plan disclosure document to the investor.
Commissions and Other Fees and Charges
As with the purchase of a mutual fund, a number of fees and charges may affect the
total return on an investment in a 529 college savings plan. A commission or "load"
may be charged in connection with a sale of plan shares. In addition, the issuer
may charge annual or other miscellaneous fees. Further, the investment management
firm typically will charge a fee based on the assets under management. Where the
assets of a 529 college savings plan are invested in one or more mutual funds, any
fees or charges associated with these underlying investments should also be factored
into the total return on an investment. Many of these fees and charges will be paid
out of the assets in the plan and therefore will be paid by investors in the form of
a reduction in share values. Other charges, including but not limited to any up-front
sales loads charged by broker-dealers or annual account maintenance fees charged by
issuers or their agents, will be payable directly by the investor.
Investing Directly Through the State Plan
Many states permit investors to invest in their 529 college savings plans by purchasing
shares directly through state personnel without the assistance of a broker-dealer.
In a few states, this is the only manner in which investments are permitted. In
many other states, shares can be purchased either through state personnel or through
broker-dealers. Often, purchases through state personnel may be limited either to
purchases made by residents of that state or to investments in selected portfolios
offered through the plan. MSRB rules do not apply to sales by state personnel, though
they may apply to other investment professionals who assist the state in structuring,
administering or distributing the plan.
Investing Through a Broker-Dealer
Many 529 college savings plans are marketed by broker-dealers. In some states,
investments may only be made through broker-dealers, while in other states investments
may be made either directly through the state or through a broker-dealer. Typically, a
broker-dealer will act as the underwriter or primary distributor of a state's 529 college
savings plan. Often, this broker-dealer is affiliated with the investment management firm
engaged by the state to manage the investment of plan assets. In many 529 college savings
plans, broad distribution networks of selling broker-dealers and banks have been established
to assist primary distributors in marketing the plans. A broker-dealer may be a member of one
or several distribution networks and therefore may market several different 529 college savings
plans. However, such broker-dealer typically will not be able to offer every state's plans to
its customers. If a customer wishes to invest in a 529 college savings plan not offered
by a particular broker-dealer, the customer will need to contact the plan directly
or a broker-dealer that is authorized to market that plan. Broker-dealers must conduct
their marketing activities in compliance with MSRB rules. MSRB rules establish important standards
of fair practice, disclosure, suitability and professional qualifications for broker-dealers.
Federal Tax Law Features
529 college savings plans are characterized by three principal types of federal
tax benefits. First, investment earnings from a plan are excluded from gross income
of both the account owner and the beneficiary for federal income tax purposes if
used to pay "qualified higher education expenses." Such qualified higher education
expenses generally include tuition, fees, books, supplies and room and board for
students who attend at least half-time. Investment earnings not used to pay qualified
higher education expenses will be subject to taxation and a penalty for the tax year
in which such earnings are distributed, subject to certain exceptions. Second, a
contributor to an account is permitted to make a single lump-sum gift of up to the
five-year cumulative limit for tax free gifting, as opposed to making separate annual
gifts, for purposes of the annual federal gift tax limitation. Third, contributions
made to an account generally are excluded from the estate of the contributor for federal
estate tax purposes. Account owners, other contributors and beneficiaries, as well as
broker-dealers and others involved in marketing 529 college savings plans, are advised
to consult with their tax consultants on these and other federal tax consequences,
and the limitations and conditions relating thereto, of investing in 529 college savings
plans. The federal tax consequences can differ significantly depending upon the specific
facts and circumstances.
State Tax and Other Benefits
Many states offer favorable state tax treatment or other valuable benefits to their
residents in connection with investments in their own 529 college savings plan.
Depending on the laws of the home state of the account owner or designated beneficiary,
favorable state tax treatment or other benefits offered by such home state for investing
in 529 college savings plans may be available only if an investment is made in the
home state's 529 college savings plan. Any such state-based benefit offered with
respect to a particular 529 college savings plan should be one of many appropriately
weighted factors to be considered in making an investment decision. Contributors
are advised to consult with their financial, tax or other adviser to learn more
about how state-based benefits (including any limitations) would apply to their
specific circumstances and also may wish to contact their home states or any other
529 college savings plans to learn more about the features, benefits and limitations
of such 529 college savings plans.
Distinguished from Pre-Paid Tuition Plans
Unlike 529 college savings plans, pre-paid tuition plans under Section 529 of the
federal income tax code established by some states and educational institutions
generally are not considered municipal securities and EMMA does not provide information
about such plans. Many of the sources cited below also provide information regarding
pre-paid tuition plans.
Searching for 529 Plan Information
The 529 Plans page of EMMA features an interactive map leading to available information about the plan or plans offered in each state.
For More Information
More information about 529 college savings plans may be obtained from each of the
states that have established a plan, the broker-dealers that market the plans and
a number of other third parties. The College Savings Plans Network (CSPN), an affiliate
of the National Association of State Treasurers, serves as a clearinghouse for information
on 529 college savings plans throughout the country. CSPN, the Investment Company
Institute (ICI) and the North American Securities Administrators Association (NASAA)
have published A Guide to Understanding 529 Plans. FINRA also has published Smart
Saving for College Better Buy Degrees: 529 Plans and Other College Savings Options.
Information regarding some of the federal tax consequences of investing in 529 college
savings plans and other education savings vehicles is available from the Internal
Revenue Service in Publication 970 Tax Benefits for Education. Information also
is available from several privately operated organizations. The MSRB does not control
or maintain these web sites, nor does it guarantee the objectivity, accuracy or
completeness of the information on these web sites.
The descriptions above are generalizations and do not necessarily accurately represent
the terms of any specific 529 college savings plan. You must read the plan disclosure
document and other relevant documents to fully understand your 529 college savings
For more information about 529 college savings plans, see our frequently asked questions about 529 college savings plans.