A 529 plan is an educational savings plan sponsored by a state or educational institution. Every state has at least one 529 plan option. They are operated by state governments and are exempt from federal income tax and are often exempt from state and local income taxes. There are two main types of 529 plans: prepaid or savings. Prepaid tuition plans generally allow those saving for college to purchase units or credits at participating colleges and universities for future tuition. Pre-paid tuition plans are guaranteed to increase in value at the same rate as college tuition.

These plans have a significant impact on financial aid eligibility. The plans are treated as a resource and therefore reduce need-based financial aid 100%, yielding a dollar for dollar reduction in aid when they are used. 529 college savings plans are also tax-exempt college savings vehicles, however, unlike prepaid tuition plan, they have a small impact on need-based financial aid eligibility.

These plans are subject to market fluctuations and provide no lock on tuition rates, therefore, making them more risky than prepaid tuition plans, but also giving them a greater potential for earning higher investment returns. Anyone can contribute money to the plan, however each state sets its own contribution limits.

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Disclosures

The information provided represents the opinions of Monetta Financial Services and is for informational purposes only. It should not be construed as a recommendation to buy or sell any security, nor as investment advise.