How does a college savings plan work?

College savings plan. This plan works similarly to a Roth IRA or Roth 401 (k) that you use to save for retirement. You invest after-tax dollars into a variety of options, such as mutual funds and exchange-traded funds. The value of your investment will increase or decrease based on the performance of your investments.

Can a college savings plan offer a prepaid tuition plan?

Educational institutions can offer a prepaid tuition plan but not a college savings plan. The first education savings plan was a prepaid tuition plan: the Michigan Education Trust (MET) was created in 1986. More than a decade later, Section 529 was added to the Internal Revenue Code, authorizing tax-free status for qualified tuition programs.

What is a 529 college savings plan?

A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. You can withdraw funds tax-free to cover nearly any type of college expense. 529 plans may offer additional state or federal tax benefits. 529 Investment Options What are some benefits of a 529 plan?