A 529 plan is one of the best tools available for saving for education. The money grows tax-free, and withdrawals for qualified education expenses are tax-free too. Here is everything you need to know to open one and use it wisely.
What Is a 529 Plan?
A 529 plan is a tax-advantaged savings account designed to pay for education expenses. It is named after Section 529 of the Internal Revenue Code. Every state offers at least one 529 plan, and you do not have to use your home state’s plan. You can open any state’s plan and use it for schools anywhere in the country.
What Can 529 Funds Pay For?
College and university costs:
- Tuition and fees
- Room and board (if enrolled at least half-time)
- Books, supplies, and equipment required for enrollment
- Computers and internet access used primarily for education
- Study abroad costs at eligible international institutions
K-12 tuition: Up to $10,000 per year per beneficiary can be used for K-12 private school tuition.
Apprenticeship programs: Registered apprenticeship programs registered with the Department of Labor qualify.
Student loan repayment: Up to $10,000 lifetime per beneficiary can be used to repay student loans. An additional $10,000 can go toward repaying loans for each of the beneficiary’s siblings.
Tax Advantages of a 529 Plan
Federal taxes: Contributions are not deductible on your federal return. However, the earnings grow tax-free, and qualified withdrawals are completely tax-free. This is similar to a Roth IRA but for education.
State taxes: More than 30 states offer a state income tax deduction or credit for contributions to their own state’s 529 plan. In some states, the deduction is significant. For example, New York allows a deduction of up to $5,000 per year ($10,000 for married couples).
If your state offers a deduction, consider using your state’s plan first, then move money to a better-performing plan if needed. Many states only offer the deduction for contributions to their own plan.
How 529 Plans Work
You open the account and designate a beneficiary, usually a child or grandchild. You contribute money, which is invested in the plan’s investment options. Most plans offer age-based portfolios that automatically become more conservative as the child approaches college age, plus individual mutual funds and index funds.
When it is time to pay for education, you take withdrawals and direct them to the school or reimburse yourself for qualified expenses you paid out of pocket.
Contribution Limits
There is no annual contribution limit for 529 plans, but contributions are considered gifts for tax purposes. For 2026, the annual gift tax exclusion is $18,000 per donor per beneficiary. Contributions above this amount may require filing a gift tax return, though you would not owe tax unless you have exceeded your lifetime gift tax exemption.
529 plans offer a special benefit called superfunding: you can contribute up to five years of gift tax exclusions at once ($90,000 per person, or $180,000 for married couples) and treat it as if spread over five years. This strategy allows large upfront contributions that can grow for years before being used.
Total account balance limits vary by state, typically from $235,000 to over $550,000.
What Happens to Leftover 529 Money?
You have several options if the beneficiary does not use all the funds:
Change the beneficiary: Roll the account over to another eligible family member: a sibling, cousin, spouse, or even the account owner themselves. This is the most common strategy when a child gets a scholarship or does not attend college.
Roll to a Roth IRA: Starting in 2024, unused 529 funds can be rolled to a Roth IRA for the beneficiary, subject to conditions: the 529 must have been open for at least 15 years, the rollover is limited to $35,000 lifetime per beneficiary, and annual Roth IRA contribution limits apply.
Withdraw for non-qualified expenses: You can always take a non-qualified withdrawal, but you will owe income tax plus a 10% penalty on the earnings portion. The principal is never taxed or penalized because you already paid tax on it before contributing.
How 529 Plans Affect Financial Aid
A 529 owned by a parent counts as a parental asset on the FAFSA. Parental assets are assessed at a maximum rate of 5.64%, meaning your expected family contribution increases by up to 5.64 cents for every dollar in the account. This is a much lower impact than student assets, which are assessed at 20%.
529 accounts owned by grandparents used to hurt financial aid more significantly, but new FAFSA rules effective for the 2024-25 school year changed this. Grandparent-owned 529 distributions are no longer counted as student income on the FAFSA.
How to Choose a 529 Plan
Look for plans with low fees and good investment options. Expense ratios add up over the years of saving. A plan charging 0.10% annually has a meaningful advantage over one charging 0.80% compounded over 18 years.
Top-rated plans with low fees include Utah’s my529, Nevada’s Vanguard 529, and New York’s 529 Direct. Morningstar publishes annual ratings of 529 plans that are worth reviewing before you open an account.
If your state does not offer a deduction, or if you have already used up the deductible amount, go with the lowest-cost plan you can find regardless of state.
Opening a 529 Plan
You can open a 529 directly through the plan’s website or through a financial advisor. Direct plans are cheaper because there is no advisor commission built in. The process is similar to opening a brokerage account: you provide basic information about yourself and the beneficiary, link a bank account, and fund it.
Anyone can contribute to an existing 529 plan, not just the account owner. Many plans offer gift contribution links you can share with grandparents around birthdays and holidays.