Definition A 529 Plan, officially known as a Qualified Tuition Plan is designed to foster savings for future educational expenses under favorable tax conditions. Governed by Section 529 of the Internal Revenue Code, these plans are typically sponsored by states or educational institutions and offer two types: prepaid tuition plans and education savings plans. Importance of 529 Plan These plans are integral for families gearing up for the hefty financial burden of educational costs.
Definition A Coverdell Education Savings Account (ESA) is a tax-advantaged savings account designed to help families save for educational expenses, including elementary, secondary and higher education. Contributions to a Coverdell ESA are made with after-tax dollars, but the earnings grow tax-free and withdrawals are tax-free when used for qualified educational expenses. The Coverdell ESA offers greater flexibility in terms of how funds can be used compared to other education savings plans, such as 529 Plans.
Definition Prepaid tuition plans are specialized savings programs that enable families to pay for their children’s future college education at current tuition rates. They are primarily designed to help offset the financial burden of rising tuition costs by allowing families to pre-purchase tuition credits or share units at specific colleges or universities. These plans can be operated by states or other qualifying entities and typically cover public college in-state tuition, though some plans may extend benefits to private institutions or out-of-state colleges.