What Is a 529 Plan?

By Joseph Hurley. | Edited by: Savingforcollege.com Editorial Team

Reviewed by Joe Messinger | Updated June 27, 2024

By Joseph Hurley. | Edited by: Savingforcollege.com Editorial Team

Reviewed by Joe Messinger | Updated June 27, 2024

A 529 plan is an investment account that offers tax-free withdrawals and other benefits when used to pay for qualified education expenses. You can use a 529 plan to pay for college, K-12 tuition, apprenticeship programs, and even student loan repayments. Any leftover funds can be used in different ways, including funding a Roth IRA.

Types of 529 Plans

There are two primary 529 plans: education savings plans and prepaid tuition plans.

Education Saving Plans

Also known as 529 college savings plans, these are tax-advantaged investment accounts designed for education savings. They work much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. 529 plans offer several investment options from which to choose. The 529 plan account will go up or down in value based on the performance of the investment options. You can see how each 529 plan’s investment options are performing by reviewing our quarterly 529 plan performance rankings.

Prepaid Tuition Plans

These plans let you pre-pay all or part of the costs of an in-state public college education. You may also convert them for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges sponsored by more than 250 private colleges.

Educational institutions can offer a prepaid tuition plan but not a college savings plan. The first education savings plan was a prepaid tuition plan: the Michigan Education Trust (MET) was created in 1986. More than a decade later, Section 529 was added to the Internal Revenue Code, authorizing tax-free status for qualified tuition programs. Today, over 100 different 529 plans are available to suit various education savings needs.

529 plans offer federal tax benefits and may offer state tax benefits depending on the state where the account owner or person contributing to the plan lives.

Federal Tax Benefits

There are two primary federal tax benefits associated with 529 plans:

  • Earnings in your account accumulate tax free. In other words, no income taxes are due on earnings as long as the money stays in your account.
  • You will not have to pay federal income taxes on withdrawals as long as the money is used to pay for qualified education expenses. In most cases, these withdrawals will also be exempt from state income taxes as well.

Note that similar to a Roth IRA, contributions to a 529 plan are not deductible from federal income taxes. 

Some families use 529 plans as an estate planning vehicle since contributions are considered completed gifts to the beneficiary. Up to $17,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion in 2023. The exclusion increased to $18,000 for contributions in the 2024 tax year.

State Tax Benefits

Depending on where you live, you may also qualify for a state tax benefit. Over 30 states offer either state income tax deductions or state tax credits for 529 plan contributions. The tax benefit is typically available for residents who invest in their home state’s 529 plan, however, many states offer a tax benefit for contributions to any state’s 529 plan. These tax benefits make 529 plans more valuable for college savings than traditional savings or investment accounts.

There are a few steps to start with a 529 plan, beginning with choosing a 529 plan and opening an account.

1. Choosing a 529 Plan

Nearly every state has at least one 529 plan available, but you’re not limited to using your home state’s plan. Each 529 plan offers investment portfolios tailored to the account owner’s risk tolerance and time horizon. Your account may go up or down in value based on the performance of the investment option you select. Considering your investment objectives and comparing your options before investing is essential. 

 Other things to consider when selecting a 529  plan are:

  • Any state tax benefits you may be eligible for and the value of those benefits
  • Fees and expenses charged by a plan and how those compare to other plans 
  • The performance history of the 529 plan. 

You can find research on all of the above on our 529 plan details pages. Or see our round-up of the best 529 plans based on our analysis and ratings.

Opening a college savings plan is easy. You can open a direct-sold 529 plan by completing an application on the plan’s website. Direct-sold plans generally offer lower fees than advisor-sold plans, but the account owner is responsible for selecting the investments. Advisor-sold 529 plans are only available through licensed financial advisors.

One of the advantages of 529 plans is that just about anyone can open one, regardless of income level. Parents, grandparents, friends, and even students themselves (if they are at least 18 years old) can open a 529 college savings plan to start a college fund. You can open an account and name a beneficiary who doesn’t even know about it until you want them to use the funds.

While anyone can open a 529 plan, each plan can only have one beneficiary at a time. A beneficiary can be anyone of any age who has a social security number or a Tax ID. You can change beneficiaries if one child doesn’t go to college, but another does, but you can’t simultaneously name multiple children as beneficiaries. You can also name yourself as the beneficiary of a 529 plan that you own. 

Once you’re ready, you can use Saving For College’s enroll now tool to open an account online. Just click on the “Enroll Now” button adjacent to the 529 plan’s listing. It will take you directly to the online application form for opening a 529 plan account.

A good place to start:

See the best 529 plans, personalized for you

Many states have no minimum amount required when contributing to your account. Other states have relatively low minimums, such as $25. 

You can also set up automatic contributions, which typically have minimums of at least $15 or $25 per contribution.

As far as maximum investments, there are no annual 529 plan contribution limits. But if you are making a significant contribution, be aware that contributions in excess of the annual gift tax exclusion ($17,000 in 2023 and $18,000 in 2024) will count against your lifetime estate and gift tax exemption (increased to $13.61 million in 2024). There is a way to make larger contributions at one time without impacting your lifetime exemption by “superfunding” a 529 plan.

Each state also has an aggregate contribution limit for 529 plans, which ranges from $235,000 to over $550,000. The price of attending an expensive college and graduate school program in the state, including textbooks and room and board, determines this amount. 

As a general rule of thumb, aiming to save about one-third of your projected future college costs is a good goal. This assumes you can cover the remaining two-thirds with current income, including scholarship funds and student loans.

4. Choosing a 529 Plan Investment Portfolio 

Once you’ve contributed funds to your 529 account, you must decide how to invest them. Typically, you have two options: 1) age-based and enrollment date portfolios or 2) static portfolios.

With age-based and enrollment-date portfolios, the asset allocation within the portfolio automatically adjusts over time based on the child’s age or the time remaining until their expected college enrollment. During the initial years, the portfolio tends to adopt a more aggressive stance, with a higher emphasis on stocks, which offer the potential for greater returns but also carry heightened risk. As the child approaches college age, these portfolios gradually transition away from riskier investments, such as equities (stocks), favoring more conservative options like bonds or money market funds. This strategic shift towards less risky holdings protects against volatility and market downturns when college expenses become imminent.

Static portfolios remain the same over the life of the plan unless the plan owner manually reallocates to other portfolios. These portfolios can be target risk portfolios, which focus on a defined level of risk or strategy, such as “aggressive growth” or “income,” or individual portfolios, which mirror a mutual fund, exchange-traded fund, or other investment.

5. Withdrawing Funds from 529 Plans to Pay for Qualified Expenses

You can use your education savings to pay for college costs at any eligible institution, including over 6,000 U.S. colleges and universities and over 400 international schools.  For example, you can be a New York resident, invest in a Virginia plan, and send your student to college in North Carolina

Once you’re ready to start taking withdrawals from a 529 plan, most plans allow you to distribute the payments directly to the account holder, the beneficiary, or the school. Some plans may allow you to pay directly from your 529 accounts to another third party, such as a landlord. 

Remember, you must check with your plan to learn more about how to take distributions from your account. Depending on your circumstances, you may need to report contributions to or withdrawals from your 529 plan on your annual tax returns.

The funds in a 529 plan are yours, and you can always withdraw them for any purpose. However, the earnings portion of a non-qualified distribution will be subject to ordinary income taxes and a 10% tax penalty, though there are exceptions.

Using a 529 Plan for Education Expenses

Qualified Education Expenses

It’s important to understand that with a 529 plan, only qualified withdrawals are tax-free. You should only use your 529 plan to pay for qualified educational expenses. 529 plan withdrawals must happen in the same tax year as the expenses incurred. This means that if you’re paying for January expenses, you can’t withdraw funds in December of the previous year, even though it’s only weeks from when you need the money.

Qualified expenses for college include costs required for enrollment or attendance, such as:

  • tuition and fees, 
  • books and materials,
  • room and board (for students enrolled at least half-time), 
  • computers and related equipment, 
  • internet access, and 
  • special needs equipment for students attending a college, university, or other eligible post-secondary educational institutions. 

In recent years, the IRS has expanded the definition of qualified education expenses beyond traditional higher education costs, including K-12 tuition expenses and student loan repayments. There is a $10,000 annual limit on qualified K-12 withdrawals and a $10,000 lifetime limit on student loans. 529 plans can also be used to pay for qualified expenses at a trade or vocational school or for registered apprenticeship program expenses.

Not all states have adopted the expanded definition of qualified education expenses, but at least 30 states have. In states that haven’t adopted it, you may be subject to state taxes on the earnings portion of any 529 plan withdrawals to pay for K-12 education, student loan payments, and trade/vocational schooling.

Non-Qualified Withdrawals and their Penalties:

There are some education costs that you may believe are necessary, but the IRS does not consider qualified expenses. For example, a college must charge a student’s health insurance and transportation costs as part of a comprehensive tuition fee for them to be qualified expenses. Alternatively, the college must identify the fee as “required for enrollment or attendance.”

Other common expenses that are considered non-qualified include:

  • Transportation and travel costs, such as gas and transit passes,
  • College application and testing fees
  • Extracurricular activities, such as club sports and fraternity or sorority activities

A common concern in the past has been what to do in case you don’t use all the money you’ve saved in a 529 account. This is now less of a potential drawback as the definition of qualified expenses has expanded, and parents have more options than ever on what to do with unused 529 funds.

When evaluating if a 529 plan is the right option for you, there are pros and cons to 529 plans to consider.

Benefits of Investing in 529 Plans

  • Minor impact on financial aid eligibility – When a dependent student or one of their parents owns a 529 plan account, there is a minimal impact on the student’s financial aid eligibility compared to other account types.
  • Federal tax treatment of gifts – Contributions to a 529 plan qualify for the annual gift tax exclusion of $18,000 per year as of 2024.
  • Earnings grow tax-deferred – Investments are not subject to taxes while in the account.
  • Tax-free withdrawalsQualified withdrawals are not subject to federal income tax and are typically excluded from state income tax.
  • State tax incentives – More than 30 states allow tax deductions for contributions to 529 plans. In most states, anyone contributing to a 529 plan can claim a deduction. 
  • Roth IRA rollovers for unused funds – For unused 529 funds, account owners can roll over up to $35,000 into a Roth IRA in the beneficiary’s name.

Potential Drawbacks of 529 Plans

  • Must be qualified expenses – Any withdrawal from a 529 account not for qualified expenses is subject to income tax and a 10% penalty.
  • Not all states offer deductions – While most states offer an income tax deduction for 529 contributions, some do not.
  • No self-directed investments – You must invest 529 accounts in portfolio options offered by the 529 plan.
  • Fees – All 529 plans have fees, though 529 account owners can find low-cost 529 plan options to limit the fees charged.
  • Ownership rules – An account owner controls a 529 plan account, not the beneficiary.


529 plans offer a valuable tool for saving and investing in education expenses. Whether you’re planning for college, K-12 tuition, or apprenticeships, these plans provide tax advantages and flexibility. Selecting the right plan, opening an account, and contributing are relatively straightforward processes, so 529 plans are very attractive for many families looking to secure their loved ones’ educational future.

About the Reviewer

Joe Messinger, CFP, ChFC, CLU, is a partner and director of college planning at Capstone Capital Wealth Partners. He created Capstone’s College Pre Approval process that guides clients through a process that allows families to save the money they need and eliminate the stress and anxiety around paying for college. When it comes to college funding, Joe is here to raise the bar and get more financial advisors trained to serve our communities better.

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About the author

Joseph Hurley Joe Hurley launched Savingforcollege.com in 1999 while working as a tax CPA in Rochester, New York. He wrote and self-published the book 'The Best Way to Save for College--A Complete Guide to 529 Plans', now in its eleventh edition with over 100,000 copies sold.

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