In Graphics: How Does a 529 Plan Work?

For most parents, paying college tuition out of pocket is simply out of the question: with budgets stretched thin to cover mortgage or rent, and basics like food and clothes, who has several thousand dollars every semester (or month, depending on the cost of tuition, fees, room and board) to send over to the Bursar’s office? So chances are, any forward-looking parent (or grandparent) has done the next best thing: started budgeting for college expenses and saving, years in advance. If you’re one of those parents, you probably know what a 529 Plan is: named after Section 529 of the Internal Revenue Code, these investment vehicles allow you to sock away money for education expenses in a tax-advantaged way. Your earnings accumulate tax free and, if used for qualified educatione expenses, withdrawals are tax-free, as well. But choosing a 529 Plan is no simple thing and many investors don’t have a full understanding of how these things work. We give you the basics in this infographic.