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By FinanceBuddy Staff Writer
A 529 Plan, or Qualified Tuition Plan, is a tax advantaged savings plan designed to save for future college tuition costs. 529 Plans come in two types: college savings plans and pre-paid tuition plans. Every state in the U.S. sponsors a 529 plan. Pre-paid tuition plans are also sponsored by a group of colleges and universities. Here are the major differences between the two types of plans: Pre-Paid locks in tuition prices at both public and private colleges and universities that are eligible. All plans cover tuition and mandatory fees only. Some allow you to purchase a room and board option or for qualified expenses, use excess tuition credits. Most state plans have age or grade requirements. State plans are backed (guaranteed) by State funds and most states require either the owner or the beneficiary to be a resident. Also, most Plans have limited enrollment periods. College Savings Plan features no lock on tuition or other college costs. This covers all "qualified higher education expenses," including: Tuition and mandatory fees as well as books, computers and room and board. There is no age limit and no residency requirement, and there is open enrollment year-round. Earnings in 529 plans are not subject to federal or state tax (in most cases) if you use withdrawals for eligible college expenses, such as tuition, mandatory fees or room and board. If you do withdraw funds from a 529 plan and do not use it on an eligible college expense, you will be subject to income tax and an additional 10 percent federal tax penalty on the funds. Investors that purchase a college savings plan from a broker are typically subject to additional fees. If you invest in a broker-sold plan, you may pay a "load," which is basically a commission for the broker. Broker-sold 529 plans also charge an annual distribution fee that can equal up to one percent of the investment. Note: investing in a 529 plan will generally reduce a student's eligibility to participate in need-based financial aid.