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Guide to 529 Savings Plans

Key Takeaways:

  • If you are saving for college, a 529 savings plan can offer many benefits over a traditional savings account.
  • While a 529 plan balance is counted in financial aid calculations, it typically does not have a major impact on aid.
  • You can use 529 savings for qualified educational expenses, which include tuition, computers, books, and room and board.
  • Investment options and tax benefits of the 529 will vary by state.
  • Coverdell Education Savings Accounts and UTMA/UGMA are two other options that parents use to set aside money for their children’s education, with different benefits.

If you’re a parent saving for college, you have probably heard about 529 plans. Parents choose 529 plans because they offer tax advantages and conservative investment options that make it easy to save money for post-secondary education expenses. With a 529 savings plan, you can avoid student loans and still obtain need-based aid. The account doesn’t pose a significant threat to the beneficiary’s financial aid package. There are two 529 plans, and both offer tax benefits over a traditional savings account. 

A few key benefits of 529s include:

  • Qualified expenses include tuition, computers, books, and room and board

  • Prepaid tuition plans allow you to save on in-state tuition

  • No federal or state income tax on distributions

  • Tax deduction options in more than 30 states

How Does a 529 College Savings Plan Work?

A 529 college savings plan (referred to as Qualified Tuition Programs or QTPs by the IRS) is a college savings plan named after section 529 of the federal tax code. Using a 529 plan, account holders can either prepay a beneficiary’s tuition or fund an account that can be used for qualified educational expenses at an eligible institution. States, state agencies, and educational institutions can establish 529 plans. The IRS designed 529 plans to help families save for college without being penalized for taxes.

Who can own a 529 account?

In most cases, parents open a 529 account for their child, but anyone including grandparents, other family members, and friends can open an account for an eligible beneficiary. Parents and grandparents can open separate 529 accounts for a child at the time of birth. Although it’s most common to open a 529 account for dependents, you can also open a 529 account for your own educational expenses and name yourself a beneficiary.

What are 529 Prepaid Accounts vs. 529 College Savings Accounts?

There are two different types of 529 plans—529 Prepaid Tuition Plans and 529 College Savings Plans. The 529 prepaid tuition plan allows you to prepay tuition for a specific school. The college savings plan allows you to save for tuition and related expenses at any eligible school.

529 College Savings Accounts

A 529 College Savings Account can be used at any eligible institution and is usually created by a state or state agency. Though states are not required to have a 529 plan, as of 2018, every US state has at least one 529 plan, and some states have multiple 529 plans. Requirements vary for 529 college savings accounts, but in most cases, you don’t have to be a resident of a specific state to use their 529 plan. You can reside in California, invest in Utah’s My529 plan, and the beneficiary can use the 529 money to attend college in Arizona. 

529 Prepaid Tuition Plans

529 prepaid plans are not as popular as 529 college savings account, and not every state has one. These plans allow you to prepay tuition by contributing a certain amount annually. The annual contribution is converted to a “tuition certificate” which can be applied to a year of tuition at a partner school. In many cases, states that offer 529 prepaid tuition plans have strict age, residency, and expiration requirements. State plans are usually limited to specific in-state schools. Institutions or a group of institutions can also create and manage 529 prepaid plans. One example is the Private College 529 plan, which partners with over 300 private colleges.

Which higher education expenses can you pay with a 529 plan?

With a 529 college savings account, you can pay the following types of expenses:

  • Tuition and mandatory fees

  • Books

  • Required equipment

  • Computers, laptops, printers, internet fees

  • Room and board (for students that are enrolled at least half-time)

College costs that are not considered qualified education expenses include:

  • Transportation expenses

  • Optional fees

  • Sport or insurance fees

  • Mobile phone bills

With a 529 prepaid tuition plan, expenses are limited to tuition and mandatory fees.

How Does a 529 plan affect financial aid?

If the beneficiary of a 529 plan is a dependent of their parents, the 529 plan is considered a parental asset. The 529 plan is assessed at 5.64% of its worth. For example, if you have $100,000 saved in a 529 college savings account, only $5,640 will be assessed as part of the beneficiary’s Expected Family Contribution or EFC. For parents who are concerned about financial aid eligibility, a 529 college savings plan is ideal.

Where can I use a 529 plan?

For 529 prepaid tuition plans, the plan must be used at a partner institution, which is specified by the plan. Most state-run 529 plans partner with local, in-state schools. Other plans, such as the Private College 529 have a partnership network of over 300 schools in a variety of state in the US. 

For the 529 college savings account, an eligible educational institution is any institution that is eligible to receive and distribute federal financial aid. The US Department of Education has a downloadable list of 2019 eligible educational institutions, or you can use the school search feature on the Free Application for Federal Student Aid (FAFSA) website. While 529 plans are most commonly used at four-year colleges and universities, the plans can also be used at graduate schools, community college, private academies,  trade, and vocational schools.

After the Tax Cuts and Jobs Act was passed in December 2017, 529 account holders could use up to $10,000 in their 529 college savings account for K-12 tuition. These distributions were not subject to federal income tax. However, depending on how each state’s law was written, account holders could face state income tax penalties for using the money for K-12 expenses. 

As of 2018, many state 529 plans published status updates informing account holders to either postpone using accounts for K-12 expenses or retroactively approve it. If your state has not yet approved using money in a 529 account for K-12 expenses, you may have to repay tax benefits and deductions from previous years. You should contact your plan administrator and local tax professional to determine if you may use your 529 plan for K-12 expenses, especially if your plan is not in your state of residence.

What investment options are available with 529 college savings accounts?

Each state or institution typically manages the investment portfolio for plan beneficiaries. Many plans include mutual funds as an investment option. Some plans are age-based—as the beneficiary approaches college age, the investments are more conservative. For questions about the investment options in your plan, you should contact your plan administrator.

How to Find the Best 529 Plan for Your Needs

When you first began researching 529 Plans, you will likely wonder how can I sort through all of the information and choose the best 529 plan for me and my family? There are so many factors to consider when considering a 529 plan include the college you will attend, higher education expenses, investment options, financial aid, and tax deductions. Before choosing a 529 plan,  consider the following important factors and what's right for your family:

  • College choice

  • Higher Education Expenses

  • Investment options

Your choice for a 529 plan may be different for each child. Remember, you can have multiple plans for the same child. For example, a grandparent may open a 529 prepaid tuition plan in a different state. You can also have a plan for each of your children based on where they would like to attend college. You can transfer money between the 529 plans and even change the beneficiary for siblings with 529 accounts.

College Choice

Family heritage, rankings, college costs, and sports or scholarship opportunities are just a few factors that influence college decision. For some families, there is a long history of attending a particular school, and it’s expected that the beneficiary will attend that school. For other families, a student may not be picky and will attend the most affordable university. Other students look for a uniquely personalized fit.

Since prepaid tuition plans are limited to hundreds of schools in contrast to thousands of schools where you can use college savings plans, it’s best to factor this into your decision when considering which plan to choose. Also, prepaid tuition plans are very limited in that they can only be used for tuition and mandatory fees. Room and board, books, and other essential college expenses are not covered with a 529 prepaid plan. The following are a few scenarios when it is a good idea to use a 529 prepaid tuition plan:

  • Your state offers a 529 prepaid tuition plan, and the beneficiary plans to commute while attending college to reduce expenses

  • The beneficiary will attend a school that partners with the Private College 529 plan

  • The family has a long history of attending a school where the 529 prepaid tuition plan can be used

  • You have multiple children, and it is likely that at least one will attend a school that partners with your state’s 529 prepaid tuition plan

For most families, the 529 college savings account is a better option than the prepaid tuition plan because of the flexibility. A 529 college savings account can be used for a variety of expenses including room and board, computers and internet, and books, in addition to tuition and mandatory fees. Also, a 529 college savings account can be used at any eligible US institution and is not limited to a list of partner schools.

If you don’t know which college you will attend or plan to attend a private or out-of-state college, choose a 529 college savings plan. If you plan to attend an in-state public school, review available 529 prepaid tuition plans in your state.

Higher Education Expenses

The reality is that very few parents think about saving for college before their child reaches high school. For most parents, higher education expenses are not covered by savings accounts. Complete a college budget checklist and take into account where your student plans to attend college. If the beneficiary is leaning towards an out-of-state school, you’ll need to factor in ground transportation or plane tickets, furniture, housing, and food expenses. On the other hand, if the student plans to attend a nearby college while continuing to live at home, your expenses may be limited to tuition.

If your higher education expenses are limited to tuition only, try to find a 529 prepaid tuition plan. If you need to cover a variety of expenses, consider a 529 college savings account that can be used in any state.

Investment Options

Most 529 plans offer a limited variety of investment options to choose from. The plan administrator (e.g. the state or institution) always determines the offerings, but you can hire a qualified investment advisor to help you choose the best options based on what is available. Some college savings accounts and most prepaid tuition plans use an age-based investment model that offers aggressive options when the beneficiary is younger and more conservative investments as the beneficiary reaches college age.

It’s important to remember 529 plans are investment accounts and do involve some risk. Before choosing a 529 plan, you can consult with a tax advisor and the plan administrator to find out which options are available. A qualified financial advisor can help you choose the best option based on the beneficiary’s age and the contribution you can make to the account.

If your child is older than ten, choose a plan without age restrictions that will allow you to maximize your investment in less time. If your child is younger than ten, choose an age-based plan that will maximize your investment as the beneficiary reaches college age.

How To Find a 529 College Savings Plan in Your State

The easiest way to find a 529 plan in your state is to search “state +529 plans.” Keep in mind that it’s not always a good idea to enroll in your state’s 529 plan. While some states offer tax deductions, other plans offer no benefit at all to enrolling your state’s 529 plan.

How do you monitor your state’s 529 Savings Plan Investment Performance?

Your state plan will send updates about your 529 plan performance. Anytime you want to know the status of your investment, review your investment portfolio, or change your investment options, you can contact your plan administrator. Each plan has an administrator to provide support to account holders.

What are the age and income restrictions of a 529 college savings plan?

There are no income restrictions for 529 college savings plans or prepaid tuition plans. Most 529 college savings plan do not have age restrictions, but some 529 prepaid tuition plans have age restrictions. Also, the plan imposes limits on when the money must be used—usually before the beneficiary reaches age 30 or thirty years after the first tuition certificate is purchased. The following is a list of just a few 529 prepaid tuition plans with restrictions:

  • Alabama’s Prepaid Affordable College Tuition (PACT) program requires that beneficiaries be under the age of 18 and in K-9th grade at the time of enrollment. The plan benefits must be used within ten years of the beneficiary’s estimated college matriculation date.

  • The Florida Prepaid College Plan requires the beneficiary to be under 21 and in 11th grade or lower. The plan benefits must be used within ten years of the beneficiary’s estimated college matriculation date unless the beneficiary enrolls in the military or requests an extension.

  • The Mississippi Prepaid Affordable College Tuition Program requires beneficiaries to be 18 or under at time of enrollment. The plan benefits must be used within eight years of the beneficiary’s estimated college matriculation date. 

How much is your state's 529 tax benefit really worth?

State tax deductions for 529 contributions vary widely. Some states have no income tax and do not offer deductions, others have a state income tax, but do not offer deductions. Others limit deductions to 529 account holders contributing to the state plan, and some plans offer state tax deductions to individuals contributing to any 529 plan, even if it is in another state. For example, in Illinois’ Bright Start, Bright Directions, and College Illinois! 529 plans, up to $10,000 can count towards the individual contribution deduction, while in Indiana residents may only deduct a maximum yearly credit of $1,000.

Using 529 Prepaid Plans for Higher Education Expenses

Some plans, including the Maryland 529 Prepaid College Trust, Indiana’s CollegeChoice CD 529 Savings Plan, and the College Illinois! 529 Prepaid Tuition Program assess penalties if the account is used before a specific date. In some cases, it could be before the account reaches maturity, and in other cases, it could be three years. If you are planning on using the 529 plan soon to supplement a financial aid package, ensure that you enroll early enough to avoid any penalties or restrictions on distributions to cover qualified education expenses.

The Tax Implications of a 529 College Savings Plan

So, what are the federal and state tax advantages of opening a 529 college savings plan account?

For federal tax, the benefit is that you can accrue earnings in the account tax-free, so long as the money is used for a qualified higher education expense. There are no federal deductions that are specific to a 529 plan. The following table illustrates the various state tax benefits.

529 College Savings Plan State Deductions

No state deduction

Deduction for in-state Plan

Deduction for any plan







New Mexico




New York



Washington D.C.

North Dakota
















Rhode Island


New Jersey


South Carolina


North Carolina




South Dakota*










West Virginia






*=no state tax


How does investing in a 529 plan affect federal and state income taxes?

It is important to note that 529 plans have very high contribution limits that are designed to reflect the total cost of undergraduate and graduate education for college savings plans and undergraduate education for prepaid tuition plans. The lifetime contribution limits for most 529 plans ranges from $200,000 to $500,000 in most cases. 

However, the IRS imposes a gift tax on the donor for annual gifts that exceed $15,000 to an individual ($30,000 per couple, with each to donate up to $15,000). Unless the beneficiary is yourself, 529 contributions are considered gifts. This means a parent can contribute up to $15,000 per year to each child’s 529 before they are taxed, or a married couple can donate $30,000 total ($15,000 each) to each child’s 529 before they are taxed. The gift tax also applies to grandparents, relatives, friends, and anyone else that contributes to a 529 plan.

Individuals that donate to a 529 account also have the option to “superfund” the account by giving a five-year annual gift at once. The benefit of superfunding the account is that with a higher starting balance, the account will accrue higher earnings. Individuals can donate up to $75,000 (couples can donate $150,000) at one time. However, you cannot give another monetary gift to the beneficiary within this five-year period without accruing taxes. 

How much can you write off on your taxes if you have a 529 savings plan?

State tax deductions vary and depend on the amount your state offers. Some states offer a maximum of $1,000 per year, while others allow up to $10,000 per individual ($20,000 per couple) to take into account when calculating income tax. 

Penalties, Fees, and Non-Qualified Distributions

There are two conditions for avoiding taxes and penalties for 529 distributions.

  • The account must be used for the beneficiary

  • The account must be used for qualified higher education expenses, which is limited to tuition only when used for 529 Prepaid Plans and K-12 expenses

If you misuse the funds in a 529 account, the 529 distribution counts as income. There are obvious ways that individuals incur tax penalties on their contributions, but more commonly families incur a penalty in one of the following situations:

  • Distribution is spent on ineligible expenses for the beneficiary including transportation costs, medical bills, insurance payments and more.

  • The amount spent in a given year exceeds the estimated Qualified Higher Education Expense (QHEE) as determined by the institution. This situation is tricky as each year the school determines the estimated cost of attendance including room and board, books, tuition, fees, and other incidentals. This amount is typically included in the financial aid award. 

If you spend more than the QHEE, even if it is on qualified expenses like books and room and board, the excess amount is considered an ineligible expense and subject to federal and state income tax. For example, if the university publishes the estimated cost of attendance as $40,000, but you spend $45,000, the additional $5,000 is a non-qualified expense. The most common way that families do this is by exceeding the room and board allowance when using off-campus housing.

  • The money is withdrawn for an expense but is not spent within the same year as the withdrawal. If you withdraw the money and don’t use it in time (always within the same year), it will be considered an ineligible expense.

  • The money is withdrawn to be transferred to another account but is not deposited within the time limit. If you are transferring money in a 529 account to a different 529 account, there are time restrictions. In most cases, it is 60 days. If the money is not deposited by this time, it is considered an ineligible expense and subject to income tax.

What happens if the distribution is considered a non-qualified expense and subject to income tax?

If the distribution is considered a non-qualified expense, it is subject to a 10% federal tax penalty. In addition, you must pay income taxes on the earnings portion of withdrawals. This is important to note because you do not pay tax on the full distribution, just a portion of the accrued interest. The amount is also subject to state income tax. 

Scholarship, Military Academy, Disability, Death

There are four cases in which 529 account holders will avoid the 10% tax penalty, but are still required to pay taxes because the distribution is considered taxable income. If the beneficiary earns a scholarship, the account holder can withdraw up to the amount of the scholarship.

If the beneficiary attends military school, becomes disabled, or dies, the money in the 529 account may also be withdrawn without the 10% tax penalty. However, in all cases, income tax is still due. To avoid paying taxes, the money in the account can be transferred to another 529 account, you can change the beneficiary to an eligible family member, or you can transfer the money in the account to an Achieving Better Life Experience (ABLE) account for the beneficiary or an eligible relative.

529 College Savings Plan vs. Other Investments

If you are saving money for your child to use for college, the 529 education savings plan and tuition plan are not your only option. Coverdell Education Savings Accounts and the Uniform Gifts to Minors Act (UGMA) are two other options that parents use to set aside money for their children’s education. When considering 529 college savings plan vs. other investments, it’s important to think about the long-term goals and implications for the money you’ve saved.

Uniform Gift to Minors Act (UGMA)/ Uniform Transfer to Minors Act (UTMA) vs. 529 Plans

The key difference between UGMA/UTMA accounts and 529 plans is their purpose. UGMA/UTMAs are custodial accounts that transfer ownership to the minor once they become of age, while 529 plans are designed to save for tuition and qualified education expenses for beneficiaries but remain in control of the account holder.

  • Both plans have no income restrictions

  • The UGMA/UTMA is automatically transferred to the minor between the ages of (18-24, depending upon the state); 529 accounts remain in control of account holder indefinitely

  • 529 plans must be used on college expenses, UGMA/UTMA account can be used on any expense

  • UGMA/UTMA is taxable, but 529 plans are not taxed if used for qualified higher education expenses

  • UGMA/UTMA can negatively impact need-based financial aid awards like FAFSA as the account is  assessed at 20% of financial aid, 529 plans are considered parental assets and assessed at 5.64% of their value

If there is serious doubt as to whether your child will attend college, or you want to ensure the money remains in control of the beneficiary, a UGMA/UTMA account is a better option. Since 529 plans are limited to higher education expenses, you risk paying penalties, federal tax,  and losing state tax benefits if the beneficiary decides not to attend college and you choose not to transfer the 529 account to an eligible family member.

Coverdell ESA (Education Savings Accounts) vs. 529 Plans

Both the Coverdell ESA and 529 plan offer investment options for parents planning to save for their child’s education. The key differences are due to significant income and contribution restrictions imposed on the Coverdell Education Savings Account. For some parents, choosing between a Coverdell ESA and 529 is not a choice because they do not meet requirements for the account.

  • Age Restrictions. Coverdell ESAs have an age requirement—the account can accept contributions until the beneficiary is 18, and the funds must be used by their 30th birthday. 529 plans have no age restrictions.

  • Investment Options. 529 plans offer conservative investment options, such as mutual funds. The 529 plan investment portfolio is managed by the plan, while Coverdell ESA accounts are managed by the individual account owner who can evaluate their investment objectives and take a more aggressive approach.

  • Usage. In both 529 plans and Coverdell ESA accounts, the money can be used for both K-12 and higher education tuition and expenses.

  • Tax benefits. No federal or state tax benefits for the Coverdell ESA, though some 529 plans offer state tax deductions.

  • Income Limits. The 529 education savings plans and prepaid tuition plans have no income restrictions for account holders. The income limit for Coverdell ESA accounts is $95,000 to $110,000 (single) and $190,000 to $220,000 (joint).

  • Contribution Limits. Coverdell ESA contribution limits are $2,000 per beneficiary, per year, but 529 plans don’t have annual contribution limits (contributions over $15,000 are subject to taxes).

When is a 529 savings plan not the right choice for your family?

A 529 plan is an excellent way to save for college and potentially earn tax credits, but it’s not for everyone. The essential thing to remember about a 529 plan is that it is for college. If for any reason the beneficiary decides against attending college, the money may be taxed. It’s equally important to remember that the money belongs to the account holder and not the beneficiary, which is important to consider if you are not in possession of the account. 

If you are saving for college and you have at least two-three years, a 529 college savings plan is likely your best bet. If you need help choosing a 529 plan, it’s best to speak with your tax professional to discuss tax implications before choosing a plan. You can also speak with the plan administrator to obtain information about investment options, restrictions, tax benefits, and other account information.