A 529 plan (qualified tuition program) is a tax-advantaged savings vehicle established by Section 529 of the Internal Revenue Code and administered by states or educational institutions. Contributions are made with after-tax dollars (no federal deduction, though many states offer a state income tax deduction for contributions). Earnings grow federal income tax-free, and withdrawals are tax-free at the federal level when used for qualified education expenses — tuition, fees, books, room and board for enrolled students at eligible schools, and (with limits) K-12 tuition.
The two types are college savings plans (invest in mutual fund-like portfolios; value fluctuates with markets) and prepaid tuition plans (lock in current tuition rates at participating schools). The beneficiary can be changed to another family member without tax consequences, providing flexibility if the original beneficiary doesn't attend college.
Non-qualified withdrawals are subject to ordinary income tax on earnings plus a 10% penalty. However, the 10% penalty is waived if the beneficiary receives a scholarship (up to the scholarship amount), attends a U.S. Military Academy, or becomes disabled or deceased.
SECURE Act 2.0 (2022) introduced the ability to roll unused 529 assets into a Roth IRA for the beneficiary (up to $35,000 lifetime, subject to annual Roth contribution limits, after the account has been open 15+ years). This significantly reduces the penalty for over-saving in a 529.
> Exam tip: On the Series 65/66 and CFP, know that 529 contributions are not federally deductible but earnings grow and are withdrawn tax-free for qualified expenses. Know the 10% penalty rule for non-qualified withdrawals and the SECURE 2.0 Roth rollover provision. Understand that 529 assets are considered a parental asset on the FAFSA (better financial aid treatment than student assets).