A 29 account is a savings plan that lets you set aside money for a child's education before taxes take a cut
A 529 account (named after Section 529 of the Internal Revenue Code) is a tax-advantaged savings account designed specifically for education expenses. You open it in a child's name, contribute money to it over time, and the money grows tax-free as long as you use it for may have access to education costs—tuition, fees, room and board at college, K–12 private school tuition, apprenticeship programs, and student loan repayment up to certain limits.
The main benefit is that you pay no federal tax on the growth. If you put $10,000 in a 529 account and it grows to $15,000 over ten years, you owe no tax on that $5,000 gain when you withdraw it for education. That same $5,000 in a regular savings account would be taxed as interest income. Many states also offer a state income tax deduction for contributions you make to your own state's plan.
You can open a 529 account through your state's education savings program, or through a broker or financial institution that offers 529 plans from other states. Each state runs its own plan, and the rules, investment options, and fees vary. You do not have to use your home state's plan, though doing so often gives you the tax deduction.
Key Takeaways
- Money in a 529 account grows tax-free and withdrawals for education expenses are not taxed federally, which saves you money compared to a regular savings account.
- Most states offer a state income tax deduction for 529 contributions, though the amount and rules depend on which state you live in and which plan you choose.
- You can use 529 money for tuition at any accredited college, university, or trade school in the United States, plus K–12 private school tuition and up to $35,000 in student loan repayment.
- The account owner (usually a parent) controls the money and decides when and how much to withdraw, even though the account is in the child's name.
- If the money is not used for education, you owe income tax plus a 10 percent penalty on the earnings, though not on the contributions you made.
How money grows in a 529 account
When you open a 529 account, you choose how to invest the money—typically through mutual funds or age-based portfolios that automatically shift from stocks to bonds as the child gets closer to college age. The money you contribute is not tax-deductible federally (though your state may deduct it), but any growth—dividends, capital gains, interest—is not taxed while it sits in the account.
You withdraw money only when you need to pay for education. The withdrawal comes out tax-free as long as it covers a may have access to expense. If you withdraw $5,000 to pay tuition and $1,000 of that is earnings, neither the $4,000 contribution nor the $1,000 earnings is taxed. If you withdraw money for something other than education, you owe income tax on the earnings portion plus a 10 percent penalty—the contributions themselves always come out tax-free.
The account can stay open as long as you need it. If your child does not go to college, you can change the beneficiary to another family member—a sibling, cousin, grandchild, or even yourself—and keep the money growing. This flexibility is one reason 529 accounts are popular for families uncertain about their children's educational paths.
State tax deductions and how they work
Most states offer an income tax deduction for money you contribute to a 529 plan. The deduction amount and rules vary widely. Some states deduct up to $235,000 per beneficiary per year; others cap it at $2,500 or $5,000. A few states offer no deduction at all. You typically get the deduction only if you contribute to your own state's plan, though a handful of states allow deductions for contributions to any state's plan.
The deduction reduces your state taxable income, which lowers your state income tax bill. If you contribute $5,000 to your state's 529 plan and your state offers a full deduction, you reduce your taxable income by $5,000. At a 5 percent state tax rate, that saves you $250 in state taxes that year. Over time, especially if you contribute regularly, the tax savings can be substantial.
Check your state's plan website or speak with a tax professional to learn your state's specific rules. Some states phase out the deduction for high earners, and some allow you to carry forward unused deductions to future years if you hit the annual cap.
Who can open a 529 account and for whom
Almost anyone can open a 529 account for almost anyone else. Parents typically open accounts for their children, but grandparents, aunts, uncles, and family friends can also open and contribute to a 529 for a child. You can even open one for yourself if you plan to return to school. The account is in the beneficiary's name (the child's name, for example), but you—the account owner—control it entirely.
The beneficiary must have a Social Security number or tax identification number. There is no age limit for opening an account, though the money must be used before the beneficiary reaches a certain age (usually 30, though rules vary by state). If money remains in the account after that age, you can roll it over to another family member's 529 account or withdraw it and pay taxes and penalties on the earnings.
You can contribute as much as you want in a single year, but contributions over a certain amount ($18,000 per person per year in 2024, though this changes annually) count against your federal gift tax limit. If you exceed the limit, you must file a gift tax return, though you typically will not owe tax unless you have already used your lifetime gift tax exemption. Married couples can each contribute $18,000 without triggering gift tax reporting.
may have access to education expenses you can pay for
529 money can be used for tuition and mandatory fees at any accredited college, university, graduate school, or trade school in the United States. It also covers room and board if the student is enrolled at least half-time. Books, supplies, computers, and required equipment count as may have access to expenses at most schools.
K–12 private school tuition is also covered—up to $35,000 per student over their lifetime. Student loan repayment is covered up to $35,000 per student over their lifetime as well, which includes both the account beneficiary's own loans and loans taken out by their siblings. Apprenticeship program fees and costs are covered too.
Money cannot be used for room and board if the student is not enrolled at least half-time, for living expenses beyond room and board, for transportation, or for health insurance. If you are unsure whether a specific expense qualifies, contact the school's financial aid office or the 529 plan administrator before you withdraw.
What happens if the money is not used for education
If you withdraw money from a 529 account and do not use it for a may have access to education expense, you owe income tax on the earnings portion of the withdrawal, plus a 10 percent penalty on those earnings. The contributions you made always come out tax-free—the penalty applies only to growth.
Example: You contributed $20,000 over five years, and the account grew to $25,000. If you withdraw $25,000 for a non-education expense, you owe income tax plus a 10 percent penalty on the $5,000 in earnings. You do not owe tax or penalty on the $20,000 contribution. The tax rate depends on your federal tax bracket.
You can avoid the penalty by changing the beneficiary to another family member and using the money for their education instead. This is one reason 529 accounts remain flexible even if your original plan changes. If your child receives a scholarship, you can withdraw an amount equal to the scholarship without penalty (though you still owe tax on the earnings portion of that withdrawal).
Comparing 529 plans: state plans and broker plans
Every state offers at least one 529 plan, usually run by the state's higher education agency or a financial services company under contract. You can also open a 529 through a broker like Fidelity, Vanguard, or Charles Schwab, which offer plans from multiple states. The choice affects investment options, fees, and whether you get a state tax deduction.
State-sponsored plans typically offer lower fees and may give you a state tax deduction only if you use that state's plan. Broker-based plans often have more investment choices and may allow you to get a deduction from your home state even if you use a different state's plan (though this varies). Some people open accounts with multiple plans to maximize tax benefits or investment flexibility.
Compare the plans by looking at expense ratios (annual fees as a percentage of your balance), investment options, and whether your state offers a deduction. Most state plan websites have comparison tools. If you live in a state with a generous deduction and low-cost plan, using your home state's plan usually makes sense. If your state offers no deduction or high fees, you may benefit from shopping other states' plans.
Frequently Asked Questions
Does opening a 529 account hurt my child's chances of getting financial aid?
Yes, but only slightly. Money in a 529 account in the parent's name counts as a parental asset and reduces aid may be able to access by up to 5.64 percent of the account balance. A 529 in the child's name counts as a student asset and reduces aid by up to 20 percent. If you expect to need financial aid, a parent-owned 529 is better than a student-owned one, and some families choose not to open a 529 at all.
Can I change the beneficiary if my child does not go to college?
Yes. You can change the beneficiary to another family member—a sibling, cousin, grandchild, niece, nephew, or even yourself—without penalty or tax. The money stays in the account and continues to grow tax-free. This is one of the main reasons 529 accounts are flexible: if your child's plans change, the money does not have to sit idle.
What if I contribute more than the annual gift tax limit?
Contributions over $18,000 per person per year (in 2024) count against your federal gift tax exemption. You must file a gift tax return, but you typically will not owe tax unless you have already used your lifetime exemption of roughly $13.61 million. Married couples can each contribute $18,000 without filing. Check current limits with a tax professional, as these amounts change yearly.
Can I use 529 money for student loans?
Yes, up to $35,000 per student over their lifetime. This includes the beneficiary's own federal or private student loans and loans taken out by their siblings. You can withdraw the money and use it to pay down loans without penalty, though you still owe income tax on the earnings portion of the withdrawal.
What happens to a 529 account if the beneficiary dies?
The account does not close automatically. You can change the beneficiary to another family member and keep the money growing, or you can withdraw it. If you withdraw it for a non-education purpose, you owe income tax and a 10 percent penalty on the earnings. Some states offer a waiver of the penalty in cases of death or disability—check your state plan's rules.