Today, 529 plans like Rhode Island's CollegeBound Saver are a popular way for parents and grandparents to save money for colleges and post-secondary vocational schools. These plans offer many benefits, including some unique tax advantages; in fact, the name comes from Section 529 of the Internal Revenue code.

Specifically, 529 plans offer:

  • Tax-deferred investment growth
  • Tax-free distributions for qualified expenses, like tuition, room and board, computers and laptops, and books or even things like tools if required by the program1
  • Gift- and estate-tax benefits
  • Control by you over how assets are used
  • Flexibility to use at eligible colleges, universities and vocational schools worldwide2

Saving for college, not for taxes.

Unlike taxable college savings vehicles, 529 contributions can grow free of federal and state taxes.1 The difference can be significant, as shown in the chart below.

Tax Chart

If you open a 529 account with an initial investment of $2,500 and contributed $100 every month for 18 years, there could be over $6,300 more for a qualified distribution than the same investment in a taxable account.1

Assumptions: $2,500 initial investment with subsequent monthly investments of $100 for a period of 18 years; annual rate of return on investment of 5% and no funds withdrawn during the time period specified; and taxpayer is in the 30% federal income tax bracket for all options at the time of contributions and distribution. This hypothetical is for illustrative purposes only. It does not reflect an actual investment in any particular 529 plan or any taxes payable upon distribution.

1Earnings on non-qualified distributions may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain distributions are subject to federal, state, and local taxes.

2An eligible institution is one that is eligible for federal financial aid programs.