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 Section 529 of the Internal Revenue Code
• 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 conservative 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 $10,000 per year for K-12 tuition
• 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 plans are NOT guaranteed. Account values fluctuate with the market, just like mutual funds. Only prepaid tuition plans carry a state guarantee on tuition rates.
• K-12 tuition is capped at $10,000/year from a 529. There is no cap for college 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 lock in current tuition rates at participating in-state public colleges and universities
• The state effectively guarantees tuition will be covered at today's prices, regardless of future increases
• Guaranteed by the sponsoring state (not by FDIC or SIPC)
• Much more limited in scope than savings plans

Key limitations:

• Cover tuition and mandatory fees only (not room, board, or books)
• Typically available only at in-state public institutions
• If the beneficiary attends an out-of-state or private school, the plan typically pays the equivalent of in-state public tuition
• 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 plans are guaranteed by the sponsoring state, not by FDIC or SIPC. This guarantee covers tuition rates only, not room and board.

529 Plan Comparison