Qualified tuition programs, also known as “529 plans,” are savings plans established by states and institutions of higher education. A 529 plan allows families or individuals to prepay for a student’s qualified education expenses—tuition and fees, books, and room and board for students enrolled at least part-time—or contribute to a tax-free account specifically designated for these higher education expenses. Institutions can only sponsor prepaid plans. An estimated $1.77 billion in federal tax reductions will be provided through the benefit for the 2014 fiscal year.

There are two types of savings plans: direct and state-administered/broker-administered. The federal tax benefits for 529 plans include tax-free earnings and distributions. There are no income restrictions for contributors under the federal benefits, and each contributor can add up to $60,000 in tax-free funds over a five year period per beneficiary. States offer a range of additional benefits, including tax deductions, tax-free earnings, and tax-free withdrawals. Some states also offer matching grants to low-income families who contribute to state plans. Contribution limits vary by state, but in general are limited to between $200,000 and $300,000 in tax-free savings.

For other education tax benefits, see: Tax Benefits for Education