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|This article is a part of Wikinvest's Personal Finance section and Guide to Investing. Please contribute or edit to improve it.|
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans are sponsored by states or educational institutions and are authorized by Section 529 of the Internal Revenue Code, which created these types of savings plans in 1998. All fifty states and the District of Columbia sponsor at least one type of 529 plan, as do a group of private colleges and universities.
There are two types of 529 plans: pre-paid tuition plans and college savings plans. If the proceeds from a 529 plan are used solely for education purposes, they will be exempt from federal taxes (and in most cases, state taxes as well). However, withdrawals for non-educational purposes will be subject to income tax and trigger an additional 10% federal tax penalty.
One of the main disadvantages of 529 Plans offered by asset managers such as Fidelity is the inability of account holders to change asset allocation during the year. Most account asset allocation can only be updated once per year (versus daily and monthly for most 401(K) accounts). There has also been criticism of fees charged by asset managers due to this and other restrictions.
In 2000 a total of $2.6 billion was invested in 529 plans. This grew to $14 billion in 2001 and more than $92 billion in mid-2006. The student aid resource Finaid.org projects that total investment in 529 plans will reach $175 billion to $250 billion by 2010, with a total of 10 million to 15 million accounts opened.
In 2008, many contributors to 529 Plans experienced significant drops in capital based on market value declines. The first half of 2009 is witnessing AUM growth especiallly in asset classes such as growth stocks.
When you enroll in a 529 plan, you will work either directly with a 529 Plan manager (see a list here), or through an investment manager. The company administering the account will control how the money is invested, and will charge an ongoing fee for its services. 
|Prepaid Tuition Plan||College Savings Plan|
|Locks in tuition prices at eligible public and private colleges and universities.||No lock on college costs.|
|All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.||Covers all "qualified higher education expenses," including tuition, room & board, mandatory fees, books and computers (if required)|
|Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased.||Many plans have contribution limits in excess of $200,000.|
|Many state plans guaranteed or backed by state.||No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.|
|Most plans have age/grade limit for beneficiary.||No age limits. Open to adults and children.|
|Most state plans require either owner or beneficiary of plan to be a state resident.||No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.|
|Most plans have limited enrollment period.||Enrollment open all year.|
Source: Smart Saving for College, FINRA® via SEC.gov
The fees and expenses associated with 529 plans can lower your returns, and they vary based on the type of plan. Prepaid plans typically charge enrollment and administrative fees. College savings plans may charge enrollment fees, annual maintenance fees, and asset management fees, in addition to a fee paid to the brokerage. Some of these fees are collected by the state sponsor of the plan, and some are collected by the financial services firms that the state sponsor hires to manage its 529 program. Your asset management fees will depend on the investment option you choose. Each option usually carries a portfolio-weighted average of the fees and expenses of the mutual funds and other investments in which it invests. These are likely to be different for each investment option.
If you invest in a broker-sold plan, you may pay your broker a commission for selling the college savings plan to you. Broker-sold plans also charge an annual distribution fee (similar to the “12b-1 fees” charged by some mutual funds) of between 0.25% and 1.00% of your investment.
Many broker-sold 529 plans offer more than one class of shares, which impose different fees and expenses. Here are some key characteristics of the most common 529 plan share classes sold by brokers to their customers:
If the beneficiary uses the money within a few years after purchasing Class B shares, the account holder will almost always pay a contingent deferred sales charge or load in addition to higher annual fees and expenses.