What Is a 529 Plan?

A 529 plan is a tax-advantaged savings plan designed to help pay for education. Originally limited to post-secondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019.

The two major types of 529 plans are education savings plans and prepaid tuition plans.

Education savings plans grow tax-deferred, and withdrawals are tax-free if they're used for qualified education expenses. Prepaid tuition plans allow the account owner to pay current tuition rates for future attendance at designated colleges and universities. That means that, most likely, you can lock in a lower cost of college attendance.

529 plans are also referred to as qualified tuition programs and Section 529 plans.

Key Takeaways

  • 529 plans are tax-advantaged accounts that can be used to pay educational expenses from kindergarten through graduate school.
  • There are two basic types of 529 plans: educational savings plans and prepaid tuition plans.
  • 529 plans are sponsored and run by the 50 states and the District of Columbia.
  • The rules and fees of 529 plans can differ by state.
  • 529 plans can be purchased directly from a state or via a broker or financial advisor.

Understanding 529 Plans

Although 529 plans take their name from Section 529 of the federal tax code, the plans themselves are administered by the 50 states and the District of Columbia.

Anyone can open a 529 account, but they are typically established by parents or grandparents on behalf of a child or grandchild, who is the account's beneficiary.

In some states, the person who funds the account may be eligible for a state tax deduction for their contributions.

The money in a 529 plan grows on a tax-deferred basis until it is withdrawn. What's more, as long as the money is used for qualified education expenses as defined by the IRS, those withdrawals aren't subject to either state or federal taxes. In addition, some states may offer tax deductions on contributions.

In the case of K-12 students, tax-free withdrawals are limited to $10,000 per year.

Since tax benefits vary depending on the state, it's important that you check the details of any 529 plan to understand the specific tax benefits that you may or may not be entitled to.

Types of 529 Plans

The two main types of 529 plans have some significant differences.

Education Savings Plans

529 savings plans are the more common type. The account holder contributes money to the plan. That money is invested in a pre-set selection of investment options.

Account-holders can choose the investment (usually mutual funds) that they want to invest in. How those investments perform will determine how much the account value grows over time.

Many 529 plans offer target-date funds, which adjust their assets as the years go by, becoming more conservative as the beneficiary gets closer to college age.

Withdrawals from a 529 savings plan can be used for both college and K-12 qualified expenses. Qualified expenses include tuition, fees, room and board, and related costs.

The SECURE Act of 2019 expanded tax-free 529 plan withdrawals to include registered apprenticeship program expenses and up to $10,000 in student loan debt repayment for both account beneficiaries and their siblings.

Prepaid Tuition Plans

Prepaid tuition plans are offered by a limited number of states and some higher education institutions. They vary in their specifics, but the general principle is that they allow you to lock in tuition at current rates for a student who may not be attending college for years to come. Prepaid plans are not available for K-12 education.

As with 529 savings plans, prepaid tuition plans grow in value over time. Eventual withdrawals from the account used to pay tuition are not taxable. However, unlike savings plans, prepaid tuition plans do not cover the costs of room and board.

Prepaid tuition plans may place a restriction on which colleges they may be used for. The money in a savings plan, by contrast, can be used at almost any eligible institution.

In addition, the money paid into a prepaid tuition plan isn't guaranteed by the federal government and may not be guaranteed by some states. Be sure you understand all aspects of the prepaid tuition plan.

There are no limits on how much you can contribute to a 529 account each year. However, many states put a cap on how much you can contribute in total. Those limits recently ranged from $235,000 to over $525,000.

Tax Advantages of 529 Plans

Withdrawals from a 529 plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses.

Any other withdrawals are subject to taxes plus a 10% penalty, with exceptions for certain circumstances, such as death or disability.

The money you contribute to a 529 plan isn't tax deductible for federal income tax purposes. However, more than 30 states provide tax deductions or credits of varying amounts for contributions to a 529 plan.

In general, you'll need to invest in your home state's plan if you want a state tax deduction or credit. If you're willing to forgo a tax break, some states will allow you to invest in their plans as a nonresident.

Advantages and Disadvantages of 529 Plans

Advantages  Disadvantages
High contribution limit Limited investment options
Flexible plan location Different fee levels per state
Easy to open and maintain Fees can vary; restriction on changing plans
Tax-deferred growth Restriction on switching investments
Tax-free withdrawals Must be used for education
Tax-deductible contributions Depends on state; restrictions apply

529 Plan Transferability Rules

529 plans have specific transferability rules governed by the federal tax code (Section 529). 

The owner (typically you) may transfer to another 529 plan just once per year unless a beneficiary change is involved. You are not required to change plans to change beneficiaries. You may transfer the plan to another family member, who is defined as:

  • Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
  • Brother, sister, stepbrother, or stepsister
  • Father or mother or ancestor of either
  • Stepfather or stepmother
  • Son or daughter of a brother or sister
  • Brother or sister of father or mother
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
  • The spouse of any individual listed above
  • First cousin

You aren't restricted to investing in your own state's 529 plan, but doing so may get you a tax break. Be sure to check out that plan first.

Special Considerations

As with other kinds of investing, the earlier you get started, the better. With a 529 plan, your money will have more time to grow and compound the sooner it's opened and funded.

With a prepaid tuition plan, you'll most likely be able to lock in a lower tuition rate compared to what you'd pay down the road, since many schools raise their prices every year.

If you have money left over in a 529 plan—for instance, if the beneficiary gets a substantial scholarship or decides not to go to college at all—you'll have several options.

One is to change the beneficiary on the account to another relative who qualifies according to the transferability rules. Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school. Finally, you can always cash in the account and pay the taxes and 10% penalty.

How Can I Open a 529 Plan?

529 plans can be opened directly with a state. Alternatively, many brokers and financial advisors offer 529 plans. They can help you choose from a selection of plans located around the country.

How Much Does a 529 Plan Cost?

States often charge a one-time account setup fee for a 529 plan. These have ranged from as little as $25 (in Florida) to $964 (in West Virginia) for the lowest-cost option. In addition, if you bought your 529 plan through a broker or advisor, they may charge you as much as 5% or more on the assets under management. The individual investments and funds that you have inside of your 529 may also charge ongoing fees. Look for low-cost mutual funds and ETFs to keep management fees low.

Who Maintains Control Over a 529 Plan?

A 529 plan is technically a custodial account. So, an adult custodian will control the funds for the benefit of a minor. The beneficiary can assume control over the 529 once they reach age 18. However, the funds must still be used for qualifying education expenses.

What Are Qualified Expenses for a 529 Plan?

Qualified expenses for a 529 plan include:

  • College, graduate, or vocational school tuition and fees
  • Elementary or secondary school (K-12) tuition and fees
  • Books and school supplies
  • Student loan payments
  • Off-campus housing
  • Campus food and meal plans
  • Computers, internet, and software used for schoolwork (student attendance required)
  • Special needs and accessibility equipment for students


Article Sources
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  1. U.S. Securities and Exchange Commission. "Investor Bulletin: 10 Questions to Consider Before Opening a 529 Account."

  2. Internal Revenue Service. "Topic No. 313 Qualified Tuition Programs (QTPs)."

  3. U.S. Securities and Exchange Commission. "An Introduction to 529 Plans."

  4. Congress.gov. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019," Sec. 302.

  5. Path2College529Plan. "Frequently Asked Questions."

  6. ScholarShare529. "About 529 Plans."

  7. 529 College Savings Plan. "529 Plan Comparison by State."

  8. Saving For College. "529 fee study."

  9. The Wall Street Journal. "The Fees on Your ‘529’ Tuition-Savings Plan Matter More than Ever."

  10. U.S. News. "Qualified Expenses You Can Pay for With a 529 Plan."

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