In retirement terminology, the term 529 Plan refers to a United States retirement plan which meets the requirements of the Internal Revenue Code or IRCís Section 529. This section of the IRC defines and details the qualification rules for 529 Plans. A 529 Plan is essentially a government plan to assist parents in the financing of their childrenís educational expenses.
For example, if you have just become a parent, by setting up a 529 Plan that is offered in most states, you can begin contributing to your childís education early on. 529 Plans are administered by investment companies that usually have contribution requirements and often charge a fee for administering the plan. Withdrawals are taxed at the childrenís taxation rate and can only be used for educational purposes. Non-educational withdrawals are subject to a 10% IRS penalty and are fully taxed. Funds are typically invested in bonds, stocks or mutual funds, and anyone can contribute to a 529 Plan, regardless of income level.