529 Plan Explained | U.S. News

A 529 plan, or “qualified tuition plan,” is an investment account that provides tax benefits when the savings are used for qualified education expenses.

These plans are most commonly used for college expenses but can also be used to pay for primary or secondary school tuition for the designated beneficiary. Anyone can be the beneficiary of a 529 account, provided that they have a Social Security or tax identification number, and anyone can open a 529 account since there are no income restrictions on these accounts.

A 529 plan works for education much like a Roth individual retirement account, or IRA, does for retirement. You make after-tax contributions to the 529 plan, which then grow tax-deferred in your chosen investments. The money can be withdrawn at any time and will be tax-free when used for qualified education expenses. These expenses can include tuition, room and board, fees, and even school supplies such as books or a computer. If the money is not used for qualified expenses, you may incur federal and state income taxes and a 10% penalty on the earnings.

Many states also offer state income tax deductions and tax credits for 529 plan contributions. Normally, you need to be a resident of the state to get these state tax benefits, but Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania let residents deduct contributions to any 529 plan, even out-of-state ones.

Unlike a Roth IRA, the owner and beneficiary of a 529 account don’t need to be the same person. The owner controls which investments are used in the account and designates the beneficiary. The owner can change the beneficiary to a family member at any time without incurring tax consequences, so if the originally intended recipient decides not to go to school or doesn’t use all of the funds in the account, the remainder can easily be transferred to a sibling or other family member.

Anyone can contribute to an existing 529 plan, even if that person is not the owner. 529 plans also differ from IRAs in that there are no federal contribution limits, although each state sponsors its own plan and can set state-specific contribution limits. Those limits start at $235,000. Contributions are considered gifts for federal tax purposes and thus subject to the annual gift tax exclusion, which is $16,000 per donor per beneficiary in 2022.

Each 529 plan comes with a selection of investment options. Most plans offer a variety of stock, exchange-traded fund, bond, real estate and cash-like options. Many also provide asset allocation funds, such as age-based funds that adjust the allocation to stocks and bonds to become more conservative as the beneficiary approaches college age, similar to how target-date funds work for retirement savings.

There are two types of 529 plans: education savings plans and prepaid tuition plans. An education savings plan is the most common type of 529 plan as it lets you save for qualified education expenses, including room and board, at any institution. Some of these plans will even let you use the funds for non-U.S. colleges or universities.

Prepaid tuition plans are institution-specific. Instead of investing the contributions inside the account, funds are used to purchase credits at a participating college or university for use toward future tuition and fees. You’re essentially prepaying the beneficiary’s education. These fees generally don’t include room and board.

The cost of education can be a heavy burden for families. The average cost of tuition and fees at a U.S. college or university ranges from $10,338 per year for a public in-state college to $38,185 for a private university for the 2021-2022 academic year. This puts a four-year education at $41,352 to $152,740 on average, and that’s not accounting for other costs such as room and board. The sooner you start saving for your child’s education, the better prepared you’ll be when college bills come due. With tuition increasing an average of 8% per year, it’s important for college savings to grow with the market.

529 plans are a tax-smart way to help your college savings go further. They can be a convenient way to save money for education and even allow for people beyond the account owner to make contributions to the account. While 529 plans are not the only way to save for college, they should be a consideration for any parent or guardian.

529 plans offer many benefits. The plans offer tax-free withdrawals for qualified education expenses. There are no income limits, so anyone can open or fund a 529 plan, and the programs have high contribution limits.

A major disadvantage of 529 plans is that funds must be used for the beneficiary’s education expenses to qualify for the tax benefit, meaning your money is locked into a specific use and can’t be withdrawn without incurring penalties. Plans may also have enrollment or ongoing fees. Investment options are limited by the plan, so you won’t be able to use alternate investing strategies.


A 529 plan will have some effect on the beneficiary’s financial aid eligibility, as these accounts are considered parental assets, but they are not heavily weighted in the expected family contribution, which is the dollar amount the family would be expected to pay for a child’s education. Distributions from 529 accounts are also not considered income that must be included on Free Application for Federal Student Aid, or FAFSA, applications.

529 plan fees vary depending on the type of plan and investments used within the plan. Plans may charge enrollment or application fees and ongoing administrative or maintenance fees in addition to the fees incurred by the investment funds used in the plan. Many states offer direct-sold plans, which let you avoid broker fees on the investments, and some plans will waive the administrative or maintenance fees if you have a large enough account balance or agree to an automatic contribution plan. The plan’s documentation will detail the specific fees in a given plan.

Qualified education expenses include tuition, fees, books and supplies, room and board, meal plans, special-needs equipment, and student loans. You can also use 529 funds to pay for tuition and fees at vocational, trade, primary or secondary schools. Expenses that do not qualify include health insurance, medical expenses and transportation.






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