The 529 plan is a tax-advantaged savings account designed to help families set aside money for a child's education costs.
A 529 plan is a state-sponsored investment account where you can save money for a child's college, trade school, or K-12 tuition without paying federal tax on the growth. You contribute after-tax dollars, but the money grows tax-free, and withdrawals for education expenses are not taxed either. Each state runs its own 529 program, though you can use any state's plan regardless of where you live or where the child will attend school.
The account is named after Section 529 of the Internal Revenue Code. There is no federal contribution limit per year, though some states cap how much can be saved per beneficiary (usually $235,000 to $550,000 total, depending on the state). You can open an account with as little as $25 to $100 in most plans.
Key Takeaways
- A 529 plan lets you save money for a child's education and pay no federal tax on the growth or withdrawals used for school costs.
- Each state runs its own 529 program, and you can choose any state's plan regardless of where you or the child lives.
- You can withdraw money for college, trade school, graduate school, or K-12 private school tuition, and as of 2024, up to $35,000 can roll over to a child's Roth IRA.
- Withdrawals for non-education expenses are taxed as income and charged a 10 percent penalty on the earnings portion.
- The account is owned by the parent or guardian, not the child, so it does not affect the child's financial aid may be able to access as heavily as money in the child's own name.
How money grows in a 529 account
When you open a 529, you choose from investment options offered by your state's plan—usually mutual funds, target-date funds, or age-based portfolios that shift from stocks to bonds as the child gets closer to college age. Your contributions are invested in these funds, and any gains (dividends, capital appreciation) are not taxed at the federal level. This tax-free growth is the main advantage over a regular savings account or brokerage account.
The amount your money grows depends on which investments you choose and how long the money sits in the account. A $5,000 contribution invested in a balanced fund for 10 years might grow to $7,000 to $9,000, depending on market performance—and you would owe no federal tax on that $2,000 to $4,000 gain. In a regular savings account earning 4 percent, the same $5,000 would grow to about $7,400, but you would owe income tax on the interest.
What counts as an education expense you can withdraw for
You can withdraw 529 money tax-free for tuition and fees at any accredited college, university, trade school, or graduate program. You can also use it for K-12 private school tuition (up to $35,000 per year per child as of 2024) and for up to $35,000 in student loan repayment. Room and board, books, computers, and required equipment count if the child is at least a half-time student.
Starting in 2024, unused 529 money can roll over to a child's Roth IRA (up to $35,000 lifetime) without penalty, as long as the 529 account has been open for at least 15 years. This change lets families use leftover education savings for retirement if the child does not need all the money for school.
Withdrawals for non-education expenses and penalties
If you withdraw money for something other than education—say, to pay for a car or a summer camp—you owe income tax on the earnings portion of the withdrawal, plus a 10 percent penalty on those earnings. The contribution portion (the money you put in) comes out tax-free. For example, if you contributed $10,000 and the account grew to $12,000, a $12,000 withdrawal for a non-education expense would mean you owe income tax and a 10 percent penalty on the $2,000 in gains, but not on the $10,000 contribution.
Some states also offer a state income tax deduction for 529 contributions, which means you can deduct part or all of your contribution from your state taxes. The deduction amount and rules vary by state—some allow unlimited deductions, others cap it at $235 to $550 per year. Check your state's plan website to see if you may have access to.
How a 529 affects financial aid and taxes
A 529 account owned by a parent is counted as a parental asset on the Free Application for Federal Student Aid (FAFSA), which means it can reduce the amount of need-based aid a student receives. However, parental assets are weighted less heavily than student-owned assets—roughly 5.64 percent of parental assets count toward the expected family contribution, compared to 20 percent of student assets. A 529 owned by a grandparent or other relative is not counted on the FAFSA at all, though some colleges use their own financial aid forms that do ask about grandparent-owned 529s.
If you are married and file taxes jointly, both spouses can claim the state income tax deduction for 529 contributions in most states. If you are single or file separately, you can claim the deduction only on your own return. The deduction does not reduce your federal taxable income, only your state taxable income (in states that offer it).
Choosing between your state's plan and other states' plans
Every state offers at least one 529 plan, and some offer two—a direct-sold plan (where you invest on your own) and an advisor-sold plan (where a financial advisor helps you choose investments and takes a commission). You can use any state's plan regardless of where you live. Some states offer a state income tax deduction only if you use their own plan, while others allow the deduction for any 529. Check your state's tax rules before opening an account.
Plans differ in investment options, fees, and minimum contributions. Some have low fees (0.15 to 0.30 percent per year) and a wide range of funds; others charge higher fees or offer fewer choices. Compare plans on the College Savings Plans Network website or through your state's 529 plan directly. If your state does not offer a state tax deduction, you may find a lower-cost plan in another state.
Who can open a 529 and for whom
Any adult can open a 529 account for any child, as long as you have the child's Social Security number. Parents, grandparents, aunts, uncles, and even unrelated adults can be the account owner. The child named as the beneficiary does not have to be a U.S. citizen, but the account owner usually must be. You can change the beneficiary to another family member (a sibling, cousin, or even yourself if you are going back to school) without penalty, as long as the new beneficiary is a family member under IRS rules.
There is no age limit for opening a 529 or for using the money—you can open one for a newborn or a teenager, and the child can use the money at any age as long as it goes toward education. If the child reaches adulthood and the account owner wants to transfer control, the account can be transferred to the child, though this is not automatic.
Frequently Asked Questions
Can I use a 529 for a child who is already in college?
Yes. You can open a 529 at any time and use it for current education expenses. However, the tax-free growth benefit is smaller if the money is only in the account for a year or two. If you have money to invest now for a child already in school, a 529 still saves you federal tax on withdrawals for tuition and fees.
What happens if my child gets a scholarship?
You can withdraw an amount equal to the scholarship from the 529 without the 10 percent penalty, though you still owe income tax on the earnings portion of that withdrawal. The contribution portion comes out tax-free. This rule prevents you from being penalized for the child's good fortune.
Can I move money from one 529 plan to another?
Yes, you can roll over money from one state's 529 to another state's 529 without penalty, as long as you do it correctly. A direct rollover (plan to plan) is safest. Some plans allow one rollover per year per beneficiary, so check the rules before moving money.
What if I need the money for something other than education?
You can withdraw it, but you will owe income tax and a 10 percent penalty on the earnings portion. The contribution portion is not taxed or penalized. As of 2024, you can also roll up to $35,000 into the child's Roth IRA if the account has been open for 15 years, which avoids the penalty.
Does opening a 529 hurt my child's chances of getting financial aid?
A parent-owned 529 reduces need-based aid may be able to access, but usually by less than other assets because it is counted at a lower rate. A grandparent-owned 529 does not count on the FAFSA, though some colleges ask about it separately. Merit aid is not affected by a 529 at all.