What Are the Pros and Cons of Using a 529 Plan?

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Kathryn Flynn

By Kathryn Flynn

December 14, 2023

Paying for a child’s education is a significant expense. If you’re thinking about opening a 529 plan for a child or grandchild, it’s essential to understand 529 plan rules and how they work.

This list of pros and cons of 529 plans will help you make the right choice for your child’s education savings.

Pros and Cons of 529 Plans

Federal income tax benefits and state tax benefits in 30+ states
Must use funds for educational purposes
Low maintenance
Limitations on state tax breaks
High contribution limits
No self-directed investments
Favorable financial aid treatment
Ownership rules

Advantages of Using a 529 Plan to Save for Education Costs

Let’s look at 529 plans’ pros and cons, starting with their advantages.

Tax benefits

Investing in a 529 plan has a range of tax benefits. 529 plan investments grow on a tax-deferred basis, and distributions are tax-free when used to pay for qualified education expenses, including college tuition and fees, books and supplies, some room and board costs, up to $10,000 in K-12 tuition per year, and up to $10,000 in student loan repayment per beneficiary and per sibling. Starting in 2024, beneficiaries of a 529 plan will also be able to roll over up to $35,000 tax-free to a Roth IRA in their names, subject to certain limitations.

In most cases, states exclude qualified 529 plan distributions from taxable income, and many states offer a state income tax deduction or state income tax credit for 529 plan contributions. 529 plans are the only college savings plans to offer state tax benefits. 

States may have residency requirements for tax benefits, but families are not restricted to their home state’s plan. An exception maybe if they are using a prepaid tuition plan.

Low Maintenance

A 529 plan account can be opened online or through a licensed financial advisor. Families who prefer to “set it and forget it” can select an automatic investment plan linked to a bank account or payroll deduction plan. The program manager handles the ongoing investment management within a 529 plan. For added convenience, 529 plans offer age-based or year-of-enrollment investment options. If you choose to invest in one of these, the investments will automatically shift from more aggressive, equity-based investments to more conservative, fixed-income and cash investments as your child approaches college age. This allows you to enjoy potentially higher, but more risky, returns in the earlier years, and to preserve your wealth in less risky investments in later years.

High Contribution Limits

Unlike other savings plans, such as a Roth IRA or Coverdell Education Savings Account (ESA), 529 plans have no annual contribution and high aggregate limits. Maximum aggregate limits vary by state, ranging from $235,000 to more than $500,000. The IRS considers 529 plan contributions completed gifts to the designated beneficiary for tax purposes. In 2024, up to $18,000 qualifies for the annual gift tax exclusion (up from $17,000 in 2023). There is also an election to contribute as much as $90,000 in one year without generating a taxable gift if the contribution is treated as if it were spread over five years.

Favorable Financial Aid Treatment

When a dependent student’s parent or a dependent student owns a 529 plan, it is reported as a parental asset. It has a relatively minimal effect on financial aid eligibility compared to UGMA or UTMA custodial accounts.

Distributions from 529 accounts owned by other family members or loved ones are not counted as income on the Free Application for Federal Student Aid (FAFSA).


529 plans offer the same benefits for all families, regardless of household income or contribution amount. You can invest in almost any 529 plan, no matter where you live or your child will attend college. 

Disadvantages of Using a 529 Plan

Along with the benefits, there are also a few disadvantages of 529 plans.

Penalty for Non-Qualified Withdrawals

Non-qualified distributions are subject to income tax and a 10% tax penalty on the earnings portion of the distribution. However, there are exceptions to the penalty if the beneficiary gets a scholarship, attends a U.S. Military Academy, dies, or becomes disabled.

State Income Tax Recapture

If a 529 plan account owner does a rollover into another state’s 529 plan, any state income tax deductions and credits previously claimed may be subject to recapture, and the earnings portion of the outbound rollover may be added back to state taxable income.

Limited Investment Options

A 529 plan account owner must select from a menu of investment options offered by the 529 plan. This typically includes static investment portfolios that aim to achieve a targeted level of risk, individual fund portfolios, and age-based portfolios that automatically shift asset allocation as the beneficiary gets closer to college.


The more families pay in 529 plan fees, the less they can save. Direct-sold 529 plans are less expensive than advisor-sold 529 plans, but expenses can also vary among 529 plan portfolios. Researching your options and finding a low-cost 529 plan option that meets your education savings needs is essential.

Ownership rules

The 529 plan account owner, not the beneficiary, has legal control of the money in the account. The account owner can easily change the beneficiary at any time, or worse, they can take a non-qualified distribution and liquidate the plan. This might become an issue in case of divorce, or if a parent depends on a grandparent or other relative’s 529 plan to pay for their child’s education. 

Is a 529 plan right for you?

To choose the best option for you, there are a few things you should consider when weighing up 529 plan pros and cons:

  • Are you planning to use the funds exclusively for education savings?
  • How much do you need to save for college, grad school, K-12, or apprenticeship programs?
  • What state do you live in?

529 plans can only be used to fund education expenses. Otherwise, you’ll face penalties. On the other hand, 529 plans have high contribution limits, offer significant tax benefits, and have a limited impact on financial aid.

A good place to start:

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