Saving for education can feel overwhelming, but 529 plans make it easier by offering powerful tax advantages. Named after Section 529 of the Internal Revenue Code, these state-sponsored accounts let investments grow free of federal tax, and withdrawals are tax-free when used for qualified education expenses. Many states add a state income tax deduction or credit for contributions. Recent federal laws have also expanded what a 529 can pay for. This guide explains how a 529 college savings plan works, what expenses qualify, and how to pick the right plan for your family.
Types of 529 plans
Education savings plans
Most families use education savings plans, which work like investment accounts. You contribute money, choose investments from the plan’s menu, and the account value rises or falls with the market. Funds can be used at eligible colleges and universities nationwide and at many institutions abroad.
Prepaid tuition plans
Prepaid tuition plans let you buy future tuition at participating colleges, usually in-state public institutions, at today’s prices. Only a few states still offer them to new participants. They can provide a hedge against tuition inflation but are less flexible, and rules vary when the beneficiary attends a non-participating school.
Tax benefits
- Tax-deferred growth: Earnings are not taxed while in the account.
- Tax-free withdrawals: Withdrawals for qualified expenses are free from federal income tax and generally from state tax.
- State tax deductions or credits: Many states offer a deduction or credit for contributions to the state’s own plan, and some states offer benefits for contributing to any state’s plan.
- Gift and estate planning: Contributions are treated as completed gifts. You can elect to spread a large contribution over five years for federal gift tax purposes, a strategy sometimes called superfunding.
Qualified education expenses
College and graduate school
Qualified expenses at eligible institutions include:
- Tuition and required fees.
- Books, supplies, and equipment required for enrollment.
- Computers, software, and internet access used primarily by the student.
- Room and board for students enrolled at least half time, up to the school’s cost-of-attendance allowance or actual cost of campus housing.
- Expenses for special-needs services.
K-12 education
Families can use 529 funds for tuition at elementary or secondary public, private, or religious schools. The 2025 budget reconciliation law increased the annual limit for K-12 withdrawals from $10,000 to $20,000 per beneficiary beginning in 2026, and expanded qualified K-12 expenses beyond tuition to include items such as curriculum materials, books, online educational materials, tutoring, standardized test fees, dual enrollment fees, and certain educational therapies. Check whether your state conforms to these federal changes for state tax purposes.
Apprenticeships and credentials
Fees, books, supplies, and equipment for registered apprenticeship programs qualify. The 2025 law also expanded qualified expenses to include certain recognized postsecondary credential programs, such as many workforce and professional certifications, and related costs like testing and continuing education required to maintain a credential.
Student loan repayment
Up to $10,000 per lifetime can be used to repay qualified student loans of the beneficiary, and an additional $10,000 for each of the beneficiary’s siblings.
529 to Roth IRA rollovers
Under the SECURE 2.0 Act, beginning in 2024, beneficiaries can roll unused 529 funds into a Roth IRA in their name, subject to conditions:
- The 529 account must have been open for at least 15 years.
- Contributions made in the last five years, and their earnings, cannot be rolled over.
- Rollovers count toward the annual Roth IRA contribution limit and require the beneficiary to have earned income.
- There is a lifetime maximum of $35,000.
This option reduces the risk of overfunding a 529.
Non-qualified withdrawals
If you withdraw money for non-qualified expenses, the earnings portion is subject to federal income tax and generally a 10 percent additional tax. Exceptions to the 10 percent tax apply if the beneficiary receives a tax-free scholarship, attends a U.S. military academy, becomes disabled, or dies, though income tax on earnings still applies. States may also recapture prior deductions.
Changing the beneficiary
You can change the beneficiary to another qualifying family member, such as a sibling, cousin, parent, or even yourself, without tax consequences. That flexibility helps if a child does not need all the money.
529 plans and financial aid
A parent-owned 529 plan is reported as a parent asset on the FAFSA, which is assessed at a lower rate than student assets. Withdrawals from parent-owned plans are not counted as student income. Under the simplified FAFSA, distributions from grandparent-owned 529 accounts are no longer reported as student income, which makes grandparent-owned plans more attractive than in the past. Some colleges that use the CSS Profile may treat 529 accounts differently.
How to choose a 529 plan
- Check your state’s tax benefits. If your state offers a deduction or credit only for its own plan, that benefit may outweigh slightly higher fees.
- Compare fees. Look at expense ratios and any account fees. Direct-sold plans typically have lower fees than advisor-sold plans.
- Review investment options. Most plans offer age-based or target-enrollment portfolios that become more conservative as the beneficiary approaches college, as well as static portfolios and individual funds.
- Consider performance and plan ratings from independent researchers.
- Check minimums and automatic contribution options.
You can invest in any state’s plan, regardless of where you live or where the student attends school.
How much to save
There is no single right amount. Some families aim to cover a portion of expected costs, such as one-third, expecting the rest to come from current income, financial aid, and modest loans. Start early, contribute regularly, and increase contributions as income rises. Even small automatic monthly contributions can grow substantially over 18 years.
Encouraging family contributions
Many plans offer gifting portals so relatives can contribute for birthdays and holidays. Contributions from others may qualify for state tax benefits in some states.
Coordinating with education tax credits
You cannot use the same expenses for both a tax-free 529 withdrawal and the American Opportunity Tax Credit or Lifetime Learning Credit. Families often pay a portion of tuition, often up to $4,000, from other funds to claim the full American Opportunity credit, then use the 529 for remaining expenses.
Recordkeeping
Keep receipts for every expense paid with 529 funds, along with the Form 1099-Q the plan sends each year. Match withdrawals to expenses in the same calendar year to avoid mismatches that could make part of a withdrawal taxable.
Who can own a 529 and control the account
The account owner, usually a parent or grandparent, controls investment choices and withdrawals, and can change the beneficiary. The beneficiary does not gain legal control at age 18 as with custodial accounts. Name a successor owner so the account continues smoothly if the owner dies. Some plans also allow custodial 529 accounts funded with assets from an UTMA or UGMA account, which have different control rules.
Starting a 529 plan: a simple checklist
Opening an account usually takes less than an hour online. You will need the owner’s and beneficiary’s names, dates of birth, and Social Security or taxpayer identification numbers, plus bank information for contributions. Choose an age-based portfolio if you prefer a hands-off approach, set up automatic monthly contributions, name a successor owner, and share the plan’s gifting link with relatives. Review the account once a year to confirm investments still fit your timeline and that you are capturing any available state tax benefit before your state’s contribution deadline.
Related reading: How to Fill Out the FAFSA: A Step-by-Step Guide for Students and Parents and Federal vs Private Student Loans: Key Differences Before You Borrow.
Frequently Asked Questions
What happens to a 529 if my child does not go to college?
You can change the beneficiary, keep the account for future education, roll up to $35,000 into the beneficiary’s Roth IRA under certain conditions, or withdraw funds and pay tax and generally a 10 percent additional tax on earnings.
Can I use a 529 for study abroad?
Yes, if the foreign institution is eligible for federal student aid programs.
Can I have 529 plans in more than one state?
Yes. You can open accounts in different states for the same beneficiary, subject to each plan’s maximum account balance.
Does a 529 reduce financial aid?
A parent-owned 529 has a relatively small effect on federal aid because it is assessed as a parent asset. Effects on institutional aid vary.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
