529 Plans (Qualified Tuition Programs)

Now that you understand the municipal fund securities category, let's examine the most widely known product within it: the 529 plan.

What Is a 529 Plan?

• A tax-advantaged savings plan designed to encourage saving for qualified education expenses
• Established by states or state agencies under the Internal Revenue Code provisions for qualified tuition programs
• Every state (and the District of Columbia) offers at least one 529 plan
• Two distinct types exist: savings plans and prepaid tuition plans

529 Savings Plans (Most Common)

• Contributions are invested in mutual fund-like portfolios (similar to variable annuities in structure)
• Account value fluctuates with market performance; returns are not guaranteed
• Can be used at any eligible educational institution nationwide (not limited to in-state schools)
• Investment options typically include age-based portfolios that automatically become more risk-averse as the beneficiary approaches college age
• Some plans also offer static portfolios and individual fund options

Qualified education expenses include:

• Tuition and fees
• Room and board (for students enrolled at least half-time)
• Books, supplies, and equipment (including computers)
• Up to $20,000 per year for qualified K-12 expenses
• Student loan repayment (up to $10,000 lifetime per borrower)

Think of it this way: A 529 savings plan works like a brokerage account with tax benefits. Your money goes into investment portfolios, grows (or shrinks) with the market, and you can spend it at any school in the country. The trade-off for that flexibility is that nothing is guaranteed.

Exam Tip: Gotchas

• 529 savings plan investments are NOT guaranteed. Account values fluctuate with the market. Prepaid plans focus on tuition benefits, but their sponsor backing and any guarantees vary by plan.
• K-12 withdrawals are capped at $20,000/year from a 529. There is no cap for qualified higher education expenses.
• Student loan repayment has a $10,000 LIFETIME cap per borrower, not per year.
• Age-based portfolios shift automatically. The investor does not need to rebalance.

529 Prepaid Tuition Plans

• Allow families to buy future tuition credits or units at participating colleges and universities, often in-state public schools
• The promised benefit at participating schools follows the plan contract; it is designed to address future tuition increases
• State backing is not universal; read the plan documents for its sponsor commitment and guarantees. FDIC and SIPC do not guarantee tuition benefits.
• Much more limited in scope than savings plans

Key limitations:

• Generally focus on tuition and mandatory fees; most do not cover room, board, or books
• Full tuition benefits usually apply at participating institutions, often in-state public schools; some plans include private schools
• If the beneficiary attends a school outside the plan's participating group, plan funds can still be applied toward tuition, but the amount depends on the plan's terms
• Offered by a limited number of states (many have closed to new enrollees)

Exam Tip: Gotchas

• Savings plans can be used at ANY eligible institution nationwide. Prepaid plans are primarily for in-state public schools. These two are often confused on the exam.
• Prepaid-plan guarantees vary. Some have state backing and others do not. The main benefit usually concerns tuition at participating schools, not room and board; FDIC and SIPC do not guarantee that benefit.

529 Plan Comparison

What Should You Check on Exam Day?

• Can you explain why savings plan investments can lose value and why prepaid-plan backing must be checked in its documents?
• Do you know the difference between savings plans and prepaid tuition plans?
• Can you state the annual cap on qualified K-12 withdrawals from a 529?
• Do you know the lifetime cap on student loan repayment from a 529?
• Can you explain who guarantees a prepaid tuition plan, and who does not?