Q. What is a 529 Plan? A. A Section 529 college savings plan is a tax-advantaged state-administered investment program that is authorized under Internal Revenue Code Section 529. These plans allow investors to save money in an account in which the earnings will grow free from federal income tax and, when used to pay for “qualified higher education expenses”, may be withdrawn federal income tax-free.

In many states, a participant can receive special state incentives, including state tax treatment that mirrors the federal tax treatment, tax deductions and/or other state tax benefits, based on participation in their state’s program(s).

Q. What’s the difference between a 529 prepaid tuition program and a 529 savings program?
A. Prepaid Tuition: Essentially, parents, grandparents, and other interested parties may purchase future tuition at a today’s lower rate. The program will then pay the future college tuition of the beneficiary at any of the state’s eligible colleges or universities (or comparable payment to private or out-of-state institutions). Amounts of tuition (years or units) may be purchased through a one-time lump sum purchase or monthly installment payments. The program pools the money and makes investments to enable the earnings meet or exceed college tuition increases in that state.

Savings: Savings plans (also known as investment plans) enable participants to save money in a college savings account on behalf of a designated beneficiary. Amounts contributed and any earnings on the account may then be used to pay the beneficiary’s qualified higher education expenses. Contributions can vary, depending on the individual savings goals. The plans offer various investment options that provide a variable rate of return usually based on stock or bond funds, although some plans offer investment options that guarantee a minimum rate of return.

Q. Which type of plan is better?
A. It depends upon the college plans and the investment needs and goals of the family. Most states have created innovative college savings programs individually designed to reflect the unique needs of its citizens. The plans offer affordable, flexible, and tax-advantaged options that can ensure the education of our most precious resources - the children of America. While prepaid tuition plans offer the opportunity to assure future tuition payments, savings plan assets can be used for tuition and other qualified expenses such as room and board. Some states offer their citizens both types of programs, giving families the option to choose the 529 plan that is right for them.

From:http://www.collegesavings.org

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