A 529 plan is one of the most powerful tools available for saving for education costs. Contributions grow tax-free, and withdrawals for qualified education expenses are also tax-free. If you have children or plan to, understanding 529 plans can save your family tens of thousands of dollars in taxes over time.
What Is a 529 Plan?
A 529 plan is a tax-advantaged savings account specifically designed for education expenses. The name comes from Section 529 of the Internal Revenue Code. There are two main types: college savings plans (investment accounts that grow based on market performance) and prepaid tuition plans (lock in future tuition at today’s prices). Most people use the college savings plan.
How 529 Plans Work
You open a 529 account, name a beneficiary (typically a child or grandchild), and make contributions. The money is invested in your chosen options — usually age-based portfolios that automatically shift to more conservative investments as the beneficiary gets closer to college age. Earnings grow tax-free, and withdrawals for qualified expenses are not taxed.
What Are Qualified Expenses?
- Tuition and fees at colleges, universities, and vocational schools
- Room and board (up to the school’s official cost of attendance)
- Books, supplies, and equipment required for enrollment
- Computer, software, and internet access (if required for studies)
- K-12 tuition: up to $10,000 per year per student
- Student loan repayment: up to $10,000 lifetime per beneficiary
- Apprenticeship programs registered with the Department of Labor
Tax Benefits of 529 Plans
Federal level: contributions are not deductible, but earnings grow tax-free and qualified withdrawals are federal income tax-free. State level: most states offer a state income tax deduction or credit for contributions to their own state’s plan. The deduction varies from $2,000 to $10,000 or more per year.
New: Roth IRA Rollover Option (Starting 2024)
You can now roll unused 529 funds into a Roth IRA for the beneficiary, subject to these rules: the 529 must have been open at least 15 years, rollovers count against the annual Roth IRA contribution limit ($7,000 in 2026), the lifetime maximum rollover is $35,000, and the beneficiary must have earned income at least equal to the rollover amount. This eliminated the biggest concern about 529 plans — being stuck with unused funds if a child doesn’t go to college.
Contribution Limits
529 plans don’t have an annual contribution limit, but contributions are treated as gifts. You can contribute up to $18,000 per year per beneficiary without filing a gift tax return. You can also “superfund” — contribute up to $90,000 in a single year using a special 5-year election.
What Happens If Your Child Doesn’t Go to College?
- Change the beneficiary to another family member
- Use for trade schools, apprenticeship programs, or qualifying foreign universities
- Roll to Roth IRA (up to $35,000 lifetime)
- Withdraw with penalty: earnings on non-qualified withdrawals are subject to income tax plus 10% penalty
Choosing a 529 Plan
You are not required to use your home state’s plan. Key factors: whether your state offers a tax deduction (usually worth using the in-state plan first), investment options (look for low-cost index funds), and fees (total expense ratios should be 0.20% or lower). Top-rated plans include Utah’s my529, Nevada’s Vanguard 529, and New York’s 529 College Savings Program.
How Much Should You Save?
A four-year degree at a public in-state university currently runs about $110,000 to $130,000. At private universities, $250,000 to $350,000. A rough target: save enough to cover 50% of projected costs. Saving $300 per month from birth to age 18 at 7% annual return accumulates to roughly $118,000.
Bottom Line
A 529 plan is one of the smartest ways to save for education costs. Tax-free growth, state tax deductions, and the new Roth IRA rollover option make it more flexible than ever. Start as early as possible — even small contributions benefit from years of compound growth — and choose a plan with low fees and good investment options.