What is a 529 plan?

• A. A savings plan operated by a state designed to help families set aside funds for future college costs
• B. A private investment account for retirement
• C. A government grant for research
• D. A loan offered by universities

Answer: (A)

A 529 plan is a state-operated savings plan designed to help families set aside funds for future college costs, with tax advantages to encourage saving for education. Contributions grow tax-deferred, and withdrawals used for qualified higher education expenses are free from federal income tax. Many states also offer a tax deduction or credit for contributions. There are two main types: college savings plans, which function like an investment account for a range of education costs, and prepaid plans, which lock in tuition prices. The purpose is to earmark funds specifically for education to ease future costs and reduce taxes on earnings. This isn’t a private retirement account, a government grant for research, or a loan from universities, which is why the described option best fits the concept.