Together with prepaid tuition plans, college savings plans are a qualified state tuition plan (QSTP) that is regulated by Section 529 of the tax code. These two types of plans are also called Section 529 plans. As a result of the 2001 tax cut, withdrawals used for qualified expenses are exempt from federal taxes beginning in 2002. Depending on the plan, contributions or withdrawals may be deductible from state income taxes. College savings plans invest in a professionally managed mutual fund or group of funds. You can save well over $100,000 for most college savings plans. Since states have some discretion in setting up tax rules, contribution limits, and management fees, you should read the terms and conditions of the state plan you are considering.

A 529 plan is a college savings plan in which contributions are invested, and grow based on their investment performance.