529 College Savings Plan

A 529 plan is a tax-advantaged savings account offered by states and educational institutions to help families save for education expenses (college, K-12 tuition, vocational school, student loan repayment). Contributions grow tax-free, and qualified withdrawals are tax-free.

How it works

You open a 529 account for a beneficiary (typically your child). You contribute after-tax money. The account grows tax-free and can be invested in mutual funds or age-based portfolios.

When you withdraw for qualified education expenses — tuition, fees, room and board, books, supplies — the withdrawal is tax-free. If you withdraw for non-education purposes, earnings are taxed plus a 10% penalty (but principal is returned tax-free).

Example: you contribute $50,000 to a 529 for your child over five years. It grows to $65,000. When your child enters college, you withdraw $20,000 for tuition (tax-free). The $15,000 in earnings is never taxed.

State tax deduction

Many states offer an income tax deduction for 529 contributions (varying by state). This is an added incentive: you get the federal tax-free growth AND a state income tax deduction.

Some states require you to use their state’s plan; others allow any state’s plan. Check your state’s rules during enrollment.

Two types of 529 plans

Savings plans. You open an account and invest in a portfolio. You choose how much to contribute and how to invest. Most 529s are savings plans.

Prepaid tuition plans. You prepay future tuition at current prices. These are less common, riskier (if your child does not attend the prepaid school, you may lose value), and not recommended for most families.

Investment options

Most 529 savings plans offer:

• Age-based portfolios. Automatic rebalancing as the child approaches college age.
• Individual funds. You pick specific index funds or mutual funds.
• Stable value funds. Low-risk; typically used as the child gets close to college age.

Qualified education expenses

• Tuition and fees at accredited post-secondary institutions (colleges, universities, trade schools, graduate schools).
• Room and board (if the student is at least half-time).
• Books and supplies.
• Equipment (computer, lab equipment).
• K-12 tuition (up to $35,000 lifetime per student, since 2024).
• Student loan repayment (up to $35,000 lifetime, since 2024).

Not qualified: room and board for off-campus housing in excess of certain amounts, personal expenses, transportation.

Superfunding

A sophisticated strategy: you can contribute up to five years’ worth of gift tax exclusion in one year ($90,000 per child in 2024 for unmarried individuals, $180,000 for married couples) without triggering gift tax, if you file an election. This lets you front-load a large amount while preserving other gifting capacity.

Non-qualified withdrawals and penalties

If you withdraw for non-education purposes (or excess funds), you owe tax on the earnings portion plus a 10% penalty. The principal is returned tax-free.

Exception: if the beneficiary receives a scholarship, you can withdraw scholarship-equivalent amounts penalty-free (though earnings are still taxed).

Beneficiary changes

You can change the beneficiary to another family member (sibling, cousin, even yourself) without penalty. This gives flexibility: if one child does not attend college, you can move the funds to another child.

Impact on financial aid

529 accounts in the parent’s name have minimal impact on financial aid (assessed at 5.64%). Accounts in the student’s name or grandparent’s name have higher impact. Consider consulting a financial aid advisor if substantial aid is expected.

See also