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What the Treasury Inflation-Protection Securities (TIPS) Means in the 529 Plans

In order to understand what the Treasury Inflation-Protection Securities (TIPS means in 529 plans it is important to understand what a 529 Plan is. A 529 Plan is an investment plan to save specifically for a college education. The 529 Plan, named after the code in the IRS tax code corresponding to the plan, is often used by parents as a way to set aside money for a child’s future college education when they are still young that utilizes investments in stocks and other investment tools in order to not only put money aside for that child’s college education but to increase the amount of the original investment through interest rates and return rates on particular investments.

Since the 529 Plan is a state based investment, the state sets up an account with an asset management company of its own choice and the parents open a 529 Plan account with that asset management company. The parents deal directly with the asset management company, not the state. When parents sign up for a 529 Plan they have two options in terms of how they structure their investment.

The first option when investing in a 529 Plan is to prepay tuition at a participating educational institution at the current tuition rates, guarding against tuition inflation. The downside to this option is obviously that the child must then attend that particular college and won’t have a have a choice of schools when it is ready to move forward to a college education. The child may not want to attend that particular school or may not have the credentials necessary to be admitted to that school. Parents also take the risk that school will no longer be in business by the time the child is ready to attend. The advantage is that with the huge rise in tuition costs yearly the parents will be able to lock in a low tuition rate for their child’s education.

The second investment option when investing in a 529 Plan gives parents the chance to put money into a tax-deferred earnings account that can only be used to pay for their child’s education. The advantage of this method is that the child can attend any college they choose or can qualify for. The disadvantage is that parents will be paying the current tuition rate at the time that the child attends the college, which might be significantly more than the tuition rates offered now.

Regardless of which plan the parents choose, the basic idea of the 529 Plan is the same. Parents are investing money with the idea that the earnings on that investment will grow to meet the costs of a future college education for their child. The second option is usually the one preferred by parents. When parents open a 529 Plan account they are agreeing to let their investment be handled by the asset management company chosen by the state. The asset management company may decide to put part of the initial investment in stock and part of the investment in fixed-income securities to maximize the return potential and the potential growth of the investment. This type of allocation plan is preferred because it offers investors a balanced return over the period of the investment.

In order to protect the investor against rising inflation costs, as much as one half of the investment that is designated for fixed income securities can be placed in Treasury Inflation-Protection Securities or TIPS which provide protection for the investor against inflation. So asset management companies invest the money of parents who are buying 529 Plan accounts to pay for their child’s future education in Treasury Inflation-Protection Securities or TIPS to protect that investment from inflation over the course of the investment term.