An Introduction to 529 Plans (2023)

Legislative Changes

Setting Every Community Up for Retirement Enhancement (SECURE) Act (2019) made some important changes to 529 plans.

  • It allows 529 plan distributions of up to $10,000 to repay qualified student loans of the beneficiary. An additional $10,000 can be used for the qualified student loans of each of the beneficiary’s siblings. The $10,000 cap is a lifetime – not annual – limit.
  • It allows 529 plan distributions to pay for registered apprenticeship programs.

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors with background information on 529 plans. Please also see our companion Bulletin for a few questions to consider before opening a 529 plan account.

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.

(Video) 529 College Savings Plan Fully Explained! (Beginner's Guide To 529s in 2020)

What are the differences between prepaid tuition plans and education savings plans?

Prepaid Tuition Plans. Prepaid tuition plans let a saver or account holder purchase units or credits at participating colleges and universities (usually public and in-state) for future tuition and mandatory fees at current prices for the beneficiary. Prepaid tuition plans usually cannot be used to pay for future room and board at colleges and universities and do not allow you to prepay for tuition for elementary and secondary schools.

Most prepaid tuition plans are sponsored by state governments and have residency requirements for the saver and/or beneficiary. Prepaid plans are not guaranteed by the federal government. Some state governments guarantee the money paid into the prepaid tuition plans that they sponsor, but some do not. If your prepaid tuition payments aren’t guaranteed, you may lose some or all of your money in the plan if the plan’s sponsor has a financial shortfall. In addition, if a beneficiary doesn’t attend a participating college or university, the prepaid tuition plan may pay less than if the beneficiary attended a participating college or university. It may only pay a small return on the original investment.

Education Savings Plans. Education savings plans let a saver open an investment account to save for the beneficiary’s future qualified higher education expenses – tuition, mandatory fees and room and board. Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at non-U.S. colleges and universities. Education savings plans can also be used to pay up to $10,000 per year per beneficiary for tuition at any public, private or religious elementary or secondary school.

A saver may typically choose among a range of investment portfolio options, which often include various mutual fund and exchange-traded fund (ETF) portfolios and a principal-protected bank product. These portfolios also may include static fund portfolios and age-based portfolios (sometimes called target-date portfolios). Typically age-based portfolios automatically shift toward more conservative investments as the beneficiary gets closer to college age. If you are using a 529 account to pay for elementary or secondary school tuition, you may have a shorter time horizon for your money to grow. You also may not feel comfortable taking on riskier or more volatile investments if you plan on withdrawing the money soon. Because of these things, you may consider different investment options depending on when you plan to use the money that is invested.

All education savings plans are sponsored by state governments, but only a few have residency requirements for the saver and/or beneficiary. State governments do not guarantee investments in education savings plans. Education savings plan investments in mutual funds and ETFs are not federally guaranteed, but investments in some principal-protected bank products may be insured by the FDIC. As with most investments, investments in education savings plans may not make any money and could lose some or all of the money invested.

What fees and expenses will I pay if I invest in a 529 plan?

It is important to understand the fees and expenses associated with 529 plans because they lower your returns. Fees and expenses will vary based on the type of 529 plan (education savings plan or prepaid tuition plan), whether it is a broker- or direct-sold plan, the plan itself and the underlying investments. You should carefully review the plan’s offering circular to understand what fees are charged for the plan and each investment option.

(Video) Education | Introduction to 529 Plans

Prepaid Tuition Plans. Prepaid tuition plans may charge an enrollment/application fee and ongoing administrative fees.

Education Savings Plans. Education savings plans may charge an enrollment/application fee, annual account maintenance fees, ongoing program management fees, and ongoing asset management fees. Some of these fees are collected by the state sponsor of the plan and some are collected by the plan manager. The asset management fees will depend on the investment option you select. Investors that purchase an education savings plan from a broker are typically subject to additional fees, such as sales loads or charges at the time of investment or redemption and ongoing distribution fees.

Fee Saving Tips. Many states offer direct-sold education savings plans in which savers can invest without paying additional broker-charged fees. In addition, some education savings plans will waive or reduce the administrative or maintenance fees if you maintain a large account balance, participate in an automatic contribution plan, or are a resident of the state sponsoring the 529 plan. Some 529 plans also offer fee waivers if the saver accepts electronic-only delivery of documents or enrolls online.

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

Investing in a 529 plan may offer savers special tax benefits. These benefits vary depending on the state and the 529 plan. In addition, state and federal laws that affect 529 plans could change. You should make sure you understand the tax implications of investing in a 529 plan and consider whether to consult a tax adviser.

Contributions. Many states offer tax benefits for contributions to a 529 plan. These benefits may include deducting contributions from state income tax or matching grants but may have various restrictions or requirements. In addition, savers may only be eligible for these benefits if you invest in a 529 plan sponsored by your state of residence.

Withdrawals. If you use 529 account withdrawals for qualified higher education expenses or tuition for elementary or secondary schools, earnings in the 529 account are not subject to federal income tax and, in many cases, state income tax.However, if 529 account withdrawals are not used for qualified higher education expenses or tuition for elementary or secondary schools, they will be subject to state and federal income taxes and an additional 10% federal tax penalty on earnings.

One of the benefits of 529 plans is the tax-free earnings that grow over a period of time. The longer your money is invested, the more time it has to grow and the greater your tax benefits. You will lose some of these potential benefits if you withdraw money from a 529 plan account within a short period of time after it is contributed.

(Video) An overview of Michigan's 529 College Savings Plans

What restrictions apply to an investment in a 529 plan?

There will likely be restrictions on any 529 plan you may be considering. Before you invest in a 529 plan, you should read the plan’s offering circular to make sure that you understand and are comfortable with any plan restrictions.

Investments. Education savings plans have certain pre-set investment options. It is not permitted to switch freely among the options. Under current tax law, an account holder is only permitted to change his or her investment option twice per year or when there is a change in the beneficiary.

Withdrawals. With limited exceptions, you can only withdraw money that you invest in an education savings plan for qualified higher education expenses or tuition for elementary or secondary schools without incurring taxes and penalties. Beneficiaries of prepaid tuition plans may only use their purchased credits or units at participating colleges or universities. If a beneficiary doesn’t attend a participating college or university, the prepaid tuition plan may pay less than if the beneficiary attended a participating college or university. It may only pay a small return on the original investment.

Does investing in a 529 plan impact financial aid eligibility?

While each educational institution may treat assets held in a 529 account differently, investing in a 529 plan will generally impact a student’s eligibility to receive need-based financial aid for college. You may also need to consider how having money in your 529 account for future qualified higher education expenses might affect financial aid for your student’s elementary or secondary school tuition. For many families, the larger part of a financial aid package may be in loans. So, the more you can save for school, the less debt you or your student may have to incur.

Where can I find more information?

Offering Circulars for 529 Plans. You can find out more about a particular 529 plan by reading its offering circular. The National Association of State Treasurers created the College Savings Plan Network, which provides links to most 529 plan websites.

(Video) Are 529's Really the Best Way to Save for College?

529 Expense Analyzer. 529 education savings plans have fees and expenses that can vary widely from plan to plan. The Financial Industry Regulatory Authority (FINRA) has developed a tool to help you compare how these fees and expenses can reduce returns.

Underlying Mutual Funds or Exchange-Traded Funds. Additional information about a mutual fund or ETF that is an investment option in an education savings plan is available in its prospectus, statement of additional information, and semiannual and annual shareholder reports. You can obtain these documents from the plan manager for no charge. You can also review these documents on the SEC’s EDGAR database.

Fees and Expenses. You can read about the impact fees and expenses have on your investment portfolios in the SEC’s Office of Investor Education and Advocacy’s Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio.

Brokers or Investment Advisers. Many education savings plans’ program managers are registered investment advisers. You can search for an investment adviser and view its Form ADV on You can also search for any disciplinary sanctions against a broker who may sell a 529 savings plan product, as well as information about his or her professional background and registration and licensing status, on

Financial Aid. You can read more about federal financial aid at the U.S. Department of Education’s Federal Student Aid website.

Other Online Resources. You can learn more about 529 plans and other education saving options on FINRA’s Saving for College website. The website contains links to other sites, including the College Savings Plan Network and the Internal Revenue Service’s Publication 970 (Tax Benefits for Higher Education). You can also find educational information about 529 plans on the Municipal Securities Rulemaking Board’s education center website.

An Introduction to 529 Plans (1)


What is a 529 plan in simple terms? ›

A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary. You can use a 529 plan to pay for college, K-12 tuition, apprenticeship programs and student loan repayments.

What is the main purpose of a 529 plan? ›

A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. You can withdraw funds tax-free to cover nearly any type of college expense. 529 plans may offer additional state or federal tax benefits.

What is the 529 plan and how does it work? ›

A 529 college savings plan is a specialized savings account that is used to save money for college. Each 529 plan account has an account owner, who controls the investments and selects the beneficiary, and one beneficiary. The account owner and beneficiary may be the same person.

What is the downside to a 529 account? ›

The disadvantages of 529 savings plans include limited investment options, potential fees, a penalty if you don't use the withdrawals for eligible items, and more. Review all of them below and then decide if a 529 savings plan is right for you and your future college student.

What does Dave Ramsey say about 529 plans? ›

Dave warns against using a 529 Plan that would freeze your options or automatically change your investments based on the age of your child. Stay away from so-called “fixed” or “life phase” plans. You want to stay in control of the mutual funds at all times.

What happens to 529 if child doesn't go to college? ›

What happens to unused 529 funds? Your 529 account will never expire, even if your child ends up not using it. You can leave the funds in the account, allowing investments to grow tax-deferred, and use the funds down the road for a grandchild or another qualified family member.

What are the pros and cons of a 529 plan? ›

Pros and Cons of 529 Plans
Low maintenanceLimitations on state tax benefits
High contribution limitsNo self-directed investments
Favorable financial aid treatmentOwnership rules
1 more row

Is it worth putting money into 529? ›

How the Rich Benefit From 529 Plans. One of the biggest benefits of a 529 plan is you don't have to pay capital gains tax on any distributions used for education. The capital gains tax rate is based on income, and if your household makes less than $83,350, your capital gains tax rate is 0%.

Is a 529 always a good idea? ›

529 plans aren't a good fit for everyone. If you live in a state without state income tax or no state tax benefits for using a 529, the only benefit you get is the tax-free benefit on earnings. Depending on your situation, it may make more sense to invest in another way rather than choosing a 529 plan.

How much should I put in 529 per year? ›

What does this mean for you? Choosing a 529 plan could mean a much lower monthly contribution since the money grows over time. With a 529 plan, a solid monthly contribution amount for a child born in 2022 would be about $140 for a public in-state school, $215 for public out-of-state, or $350 for a private university.

What is the average return on a 529? ›

In 2011, people thought a rate of return around 3% for a 529 plan was amazing. Since 2011, the S&P's compounded annual growth rate (CAGR) is ~12% from June 2011 to June 2020.

What happens to money in a 529? ›

You can fund education for other beneficiaries or withdraw the money entirely. Withdrawals from a 529 account for qualified higher education expenses are free from federal (and possibly state and/or local) income taxes.

Is there anything better than a 529 plan? ›

Roth IRA

Those contributions can grow tax-free, and you can take withdrawals up to the amount you've contributed without any taxes or penalties. Unlike a 529 plan, money in a Roth IRA won't count against financial aid eligibility.

Is a Roth IRA better than a 529 plan? ›

Is a Roth IRA better than a 529 plan? A 529 savings plan is generally an all-round good choice to pay for your child's (or your own) college, while Roth IRA may be a better option as a backup account to supplement educational expenses.

Can you use 529 money to buy a house? ›

Even if the student were to buy the home, they still can't use 529 plan money to make the mortgage payments. A mortgage payment is a payment on a loan and not a payment of housing costs. As such, it is not a qualified higher education expense.

What is the highest performing 529 plan? ›

The Vanguard 529 College Savings Plan

What age is too late to start a 529 plan? ›

Parents who open a 529 plan when their child is a high school freshman can still take advantage of the federal (and sometimes state) tax benefits, even if college is just a few years away.

Who owns the 529 parent or child? ›

Generally, the same person who contributed the money controls the Section 529 account. This doesn't have to be the case, however. Someone else, such as a grandparent, could make a donation but name the child's parent as the account owner, or a parent could establish the account and allow others to contribute to it.

What is the best way to save for my child's future? ›

Here are eight options to consider:
  1. Create a children's savings account.
  2. Leverage a 529 college savings or prepaid tuition plan.
  3. Use a Roth IRA.
  4. Open a health savings account.
  5. Look into an ABLE account.
  6. Open a custodial account.
  7. Set aside money in a trust fund.
  8. Use tools that teach the value of saving money.
8 Feb 2022

Should each kid have their own 529? ›

You may use a single 529 plan account to save for more than one child as long as you change the beneficiary when it's time to pay for your next child's college expenses — at no cost. In most cases, it makes sense to have a separate 529 for each child, but some parents may prefer to use a single plan.

Can 529 be used for car repairs? ›

You cannot use a 529 plan to buy or rent a car, maintain a vehicle, or pay for other travel costs. If you use a 529 distribution to pay for this type of expense, those distributions are considered non-qualified.

What college expenses can I use 529 funds for? ›

College tuition and fees
  • Qualified expenses that 529s cover. ...
  • College tuition and fees. ...
  • Vocational and trade school tuition and fees. ...
  • Elementary or secondary school tuition. ...
  • Student loans. ...
  • Off-campus housing. ...
  • Food and meal plans. ...
  • Books and supplies.

Is a 529 plan guaranteed so you won't lose money? ›

With these plans, a state guarantee makes it impossible to lose money, but you might not gain much, either, which can all but negate the entire purpose of opening a 529 plan.

Does money in a 529 grow? ›

529 plan accounts are investment vehicles

Rather, 529 account funds are invested and given the opportunity to grow — which also means they can shrink, depending on market conditions.

Is a 529 plan better than a savings account? ›

A 529 college savings account can offer some advantages that you might miss out on with a regular savings account. The main benefits of a 529 plan over a savings account include: Tax-deferred growth. Tax-free withdrawals for qualified education expenses.

Is a 529 worth it for 2 years? ›

Tax savings still count

Still, it's likely to be worthwhile, according to Alan Wolberg, a senior wealth planner at City National Bank. “If your kid has just started college and you haven't opened a 529, even getting two or three years of potentially tax-free growth in the account can be helpful," he says.

Does 529 reduce taxable income? ›

529 Plans Offer Unsurpassed Income Tax Breaks.

Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college.

How much will my 529 be worth in 18 years? ›

This chart shows that a monthly contribution of $100 will compound more if you start saving earlier, giving the money more time to grow. If you save $100 a month for 18 years, your ending balance could be $35,400. If you save $100 a month for 9 years, your ending balance could be about $13,900.

What happens to a 529 account when the child turns 18? ›

Myth: When my child turns 18, they can spend the money on anything they want. Reality: Savings in a 529 account are your assets, not your child's. The account holder controls the funds. Even when your child turns 18 years of age, they have no legal right to the money.

How much should you have in your 529 by age? ›

Keep in mind that 529 plans are investment accounts where earnings grow tax-free and are tax-free when distributions are used to pay for college.
Average college savings by age.
Age 0 – 6$7,929
Age 7 – 12$15,359
Age 13 – 17$27,559
Age 18+$27,778

How can I avoid paying taxes on 529 withdrawals? ›

5 tips for a tax-free 529 plan withdrawal
  1. Calculate your qualified expenses. ...
  2. Decide which account to use. ...
  3. Match your 529 plan withdrawal to qualified education expenses. ...
  4. Make the distribution payable to the beneficiary. ...
  5. Evaluate any leftover funds.

Can you take cash out of a 529? ›

You can call your plan administrator, make a request online, or submit a withdrawal request form. The plan can send withdrawals by check to the account owner, the beneficiary, or the school. You can transfer the money to yourself or the beneficiary electronically and then make payment to the school.

Should parents or grandparents open 529? ›

As a result, financial planners have encouraged parents to only open up a 529 plan in their name and have the grandparents contribute directly to their plan. Untaxed student income can offset financial aid by 50%, meaning that a $5,000 distribution from grandparents 529 could reduce financial aid by $2,500.

What's the best way to save for child's college? ›

College Savings Options: The Best Way to Save for College
  1. Mutual Funds. Mutual funds are diversified investments managed by a financial advisor or bank investment specialists. ...
  2. Custodial accounts under UGMA/UTMA. ...
  3. Qualified U.S. Savings Bonds. ...
  4. Roth IRA. ...
  5. Coverdell ESA. ...
  6. 529 plan.

What percentage of income should go to college fund? ›

Our rule suggests a savings target of approximately $2,000 multiplied by your child's current age, assuming attendance at a 4-year public college (at $22,180/year), and your family aims to cover approximately 50% of college costs from savings.

How are 529 plan taxed if not used for education? ›

If assets in a 529 are used for something other than qualified education expenses, you'll have to pay both federal income taxes and a 10% penalty on the earnings. (An interesting side note is that if the beneficiary gets a full scholarship to college, the penalty for taking the cash is waived.)

Is a laptop a qualified 529 expense? ›

Computers and related equipment and services are considered qualified expenses if they are used primarily by the beneficiary during any of the years that the beneficiary is enrolled at an eligible educational institution.

What are the advantages and disadvantages of 529 plans? ›

Pros and Cons of 529 Plans
Low maintenanceLimitations on state tax benefits
High contribution limitsNo self-directed investments
Favorable financial aid treatmentOwnership rules
1 more row

What are the rules of a 529 plan? ›

The good news for savers is that 529 plans don't limit how long money can remain in the account. The only rule is that the account must have a living beneficiary. You can open a 529 plan for a child and keep money in the account until they're 80 years old or older.

How much money do you need to start a 529 account? ›

There is no minimum to open or contribute to a 529 account. With the automatic investment plan , the minimum contribution level is $15 per month or $45 per quarter. $250, or $25 if you choose automatic monthly investing.

How long does money have to sit in 529? ›

529 plans do not have withdrawal deadlines. A 529 plan account owner is not required to take a distribution when the beneficiary reaches a certain age or within a specified number of years after high school graduation, and funds can remain in the 529 plan account indefinitely.

How much should you put in a 529 each month? ›

With a 529 plan, a solid monthly contribution amount for a child born in 2022 would be about $140 for a public in-state school, $215 for public out-of-state, or $350 for a private university.

How much can you withdraw from 529 per year? ›

There is no numeric limit for 529 plan withdrawals as long as the withdrawal amount is consistent with the cost of your qualified education expenses. However, if you're withdrawing money for students between K-12, the tax-free withdrawal limit is $10,000 per year.

Can I use 529 to buy a house? ›

Even if the student were to buy the home, they still can't use 529 plan money to make the mortgage payments. A mortgage payment is a payment on a loan and not a payment of housing costs. As such, it is not a qualified higher education expense.

Can a 529 be cashed out? ›

529 plan account owners can withdraw any amount from their 529 plan, but only qualified distributions will be tax-free. The earnings portion of any non-qualified distributions must be reported on the account owner's or the beneficiary's federal income tax return and is subject to income tax and a 10% penalty.

What is the best college fund for a child? ›

For most parents looking for a way to save for their child's college education, a 529 college savings plan is a wise choice. That's because the money you invest in one of these accounts grows tax-free if you use the funds toward eligible education expenses. Individual states offer 529 plans.

Do you have to contribute monthly to a 529? ›

There is no requirement that you continue making contributions to a 529 plan. You can stop making contributions to a 529 college savings plan at any time without having to pay a fee or other penalties. There are many reasons why a family might decide to stop contributing to a child's 529 plan.


1. Getting to know the Washington 529 College Savings Plans (WA529) – GET and DreamAhead
(Guaranteed Education Tuition (GET) - Washington's 529 Prepaid Tuition Plan)
2. 529 Plans EXPLAINED: Tax-Advantaged College Savings Account
(Logan Allec)
3. VSAC Shows You How: 529 Plans
(Vermont Student Assistance Corporation)
4. The Basics of 529 College Savings Plans
(Morningstar, Inc.)
5. 529 Plan Explained
(Carlin Financial Group)
6. 529 College Savings Plans versus Prepaid Tuition Plans
(Invest with JGA)
Top Articles
Latest Posts
Article information

Author: Carmelo Roob

Last Updated: 02/09/2023

Views: 6093

Rating: 4.4 / 5 (65 voted)

Reviews: 80% of readers found this page helpful

Author information

Name: Carmelo Roob

Birthday: 1995-01-09

Address: Apt. 915 481 Sipes Cliff, New Gonzalobury, CO 80176

Phone: +6773780339780

Job: Sales Executive

Hobby: Gaming, Jogging, Rugby, Video gaming, Handball, Ice skating, Web surfing

Introduction: My name is Carmelo Roob, I am a modern, handsome, delightful, comfortable, attractive, vast, good person who loves writing and wants to share my knowledge and understanding with you.