529 plans: frequently asked questions


Learn the ins and outs of 529 plans with this FAQ, including why they’re a popular savings vehicle for paying for college.
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A 529 plan is among the most powerful tools available when it comes to saving money for education — one that can provide benefits for tax-advantaged investing, estate planning and more.

As you navigate your college savings journey, we can help you understand how a 529 plan can help you reach your student’s education goals and find the right account that can serve your family’s needs. Here are answers to frequently asked questions about 529 plans:

In this article

What is a 529 plan?

529 plans are tax-advantaged savings plans sponsored by and run by the states to help pay for education.

Originally created to help parents save money for their children’s college expenses, 529 plans can also be used to pay for apprenticeship programs, education loan payments, certain K-12 education costs ($10,000 lifetime maximum) and lifelong learning. They can also be beneficial for estate planning.

What types of 529 plans are there?

There are two types of 529 plans: savings plans and prepaid tuition plans.

  • Savings plans allow you to contribute after-tax money into an investment account on behalf of a designated beneficiary (usually your child, but it could be a grandchild, niece, nephew, family friend or even yourself). The money grows tax-deferred. Withdrawals are tax-free if the distributions are used for qualified education expenses.
  • Prepaid tuition plans let you pay in advance for tuition at designated public and private colleges and universities at today’s prices, helping to manage future costs. All 50 states and the District of Columbia currently sponsor at least one type of 529 plan, though prepaid tuition plans are less common and not available through financial advisors. As of 2023, the only states to offer prepaid tuition plans are Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas and Washington.

Because prepaid tuition plans are increasingly rare and not widely available to investors, this article will focus specifically on the dynamics and intricacies of 529 savings plans.

What types of 529 plans are there?

There are two types of 529 plans: savings plans and prepaid tuition plans.

  • Savings plans allow you to contribute after-tax money into an investment account on behalf of a designated beneficiary (usually your child, but it could be a grandchild, niece, nephew, family friend or even yourself). The money grows tax-deferred. Withdrawals are tax-free if the distributions are used for qualified education expenses.
  • Prepaid tuition plans let you pay in advance for tuition at designated public and private colleges and universities at today’s prices, helping to manage future costs. All 50 states and the District of Columbia currently sponsor at least one type of 529 plan, though prepaid tuition plans are less common and not available through financial advisors. As of 2023, the only states to offer prepaid tuition plans are Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas and Washington.

Because prepaid tuition plans are increasingly rare and not widely available to investors, this article will focus specifically on the dynamics and intricacies of 529 savings plans.

What are the biggest benefits of a 529 plan?

The most significant benefits are:

  • Tax advantages: Contributions are made with after-tax dollars1 and earnings in a 529 plan compound annually free of federal and generally state taxes. In addition, withdrawals for qualified education expenses are tax-free.
  • Flexibility and convenience: There are no income limits for contributors, and no age limits on beneficiaries. You can also enroll in any 529 plan regardless of where you or the beneficiary lives. Most plans also have low investment minimums and high contribution limits (up to $400,000 or more per beneficiary).
  • Control: The owner of the 529 plan retains full control over the account. The owner can change the designated beneficiary, without incurring tax or penalties, if the new beneficiary is a family member of the old beneficiary.  The owner can also change 529 plan investment options twice per year.
  • Retirement savings opportunity: Beneficiaries of 529 plans that have been in place for 15 years or more can transfer certain assets from the 529 plan to the beneficiary’s Roth IRA. The transfer is subject to the beneficiary’s annual IRA contribution limit and the beneficiary must have annual income equal to or greater than the contribution amount.  The transfer is subject to a lifetime maximum of $35,000. You should consult your tax adviser for more information.

What type of educational expenses can a 529 plan be used for? 

One of the most attractive benefits of 529 plans is that any withdrawal to pay for a qualified education expense is completely free from federal income tax (and may also be exempt from state income tax).

Qualified education expenses include:

  • The full cost of tuition, fees, books, computers and related equipment, and room and board (assuming the student is attending at least part-time) at any college or graduate school in the U.S. or abroad accredited by the U.S. Department of Education. 
  • The cost of certified apprenticeship programs registered with the U.S. Department of Labor.
  • Student loan repayments (up to a $10,000 lifetime limit per beneficiary and $10,000 per each of the beneficiary's siblings).
  • K-12 tuition expenses up to $10,000 per year.

For the most current listing of qualified education expenses, please refer to IRS Publication 970.

What are not considered qualified educational expenses? 

The most common expenses a student may encounter that aren’t considered qualified expenses under 529 plans are travel (even to and from school) and health care.

How does SECURE Act 2.0 impact 529 plans?

In December 2022, SECURE Act 2.0 was signed into law to enhance retirement savings opportunities for Americans. One provision allows owners of a 529 plan to move unused funds in the account directly to the plan beneficiary’s Roth IRA.

This option may provide beneficiaries with tax-free retirement money. Prior to this law, if beneficiaries used assets in a 529 plan for anything other than qualified educational expenses, the earnings portion of any nonqualified distribution was subject to ordinary income taxes and a 10% penalty.

Learn moreHow new 529 plan rules can help with retirement planning

What happens if I use 529 funds for non-eligible expenses?

If you take money from your account for a nonqualified expense, the earnings portion of the withdrawal is subject to federal income tax — and a 10% federal penalty. It may also be subject to state income tax and penalties.

What are some potential limitations of a 529 plan? 

  • You can only make cash contributions to 529 plans — no stocks, bonds or mutual funds. If you have money tied up in such assets and would like to invest that money in a 529 plan, you must liquidate the assets first.
  • If you want to change your investment options in your 529 plan, you can generally only do so twice per calendar year for your existing contributions. (However, you can change your investment options at any time for future contributions, or when you change the account’s beneficiary.)
  • 529 plan owners interested in making contributions or withdrawals for K-12 educational expenses3 should understand their state's rules and how those funds will be treated for tax purposes. 

Does it matter which state’s plan I use?

Each state’s 529 plan has different investment options and fees. Account owners may qualify for state tax credits or deductions if they use the 529 plan from the state they reside in. However, see your tax professional to determine applicable rules and the availability of any state tax credits and deductions.

Who can own or contribute to a 529 plan?

Virtually anyone over the age of 18 can open a 529 plan for a student or contribute to an existing one: parents, grandparents, aunts, uncles, siblings and friends.

How much can I contribute to a 529 plan?

Most states' plans have contribution limits of $400,000 or more to reflect the cost of some of the most expensive colleges and universities in the country. States are likely to continue to raise the limits to keep up with increasing college expenses.

Is there a minimum contribution required to start a 529 plan?

It depends on the plan. Many plans have minimum contribution requirements, but some plan minimums are waived or lowered if you set up your account for automatic payroll deductions or bank-account debits. Like contributions, minimums vary by plan, so be sure to ask your plan administrator. 

Can I open a 529 plan in anticipation of future (grand)children?

Considering the rising costs of college, it’s smart to plan ahead. But how far ahead can you plan? Although a 529 plan technically needs a named living beneficiary, there is a way to start saving for a child’s education before they’re born.

You can open a 529 plan, name yourself as a beneficiary and start contributing. Once your child or intended beneficiary is born, you can switch the beneficiary to the child before you need to use the education funds. This allows you to start saving for their future education now, while also benefiting from a longer time horizon.

However, there are risks with this approach. For example, if you eventually decide not to have children or your student decides higher education is not right for them, you’ll have to evaluate your options with your 529 account. (Remember, there’s a 10% penalty and tax consequences if 529 plan withdrawals are used for something other than qualified educational expenses).

Advice spotlight

Consider how you can use a 529 plan’s beneficiary feature to cover the education needs of your entire family. In addition to a 529 plan’s generous contribution limits and tax advantages, one of the account’s most powerful aspects is that the owner can easily change the beneficiary from one person to another.2 

Is it better to put money into a plan as a lump sum or as regular contributions?

The answer to this frequent 529 plan question ultimately depends on your situation. Since a 529 plan allows earnings to grow tax-deferred, the sooner you contribute money, the sooner it can potentially generate earnings.

If the fees charged by your 529 plan account decrease as your contributions rise, investing a large lump sum could potentially reduce the amount you pay in fees over the long term. However, if the lump sum is large, it could potentially have unwanted gift tax consequences.

Periodic investing, through strategies like dollar-cost averaging, lets you easily direct future contributions to other investment options in your plan account. Additionally, for many investors, it can be more practical to fund their account with monthly contributions rather than a lump sum.

How do I optimize my 529 plan contributions for tax purposes?

There are a couple of potential strategies you can use to optimize your contributions.

If your state offers an income tax deduction for contributing to its plan, consider contributing as much as possible in your high-income years. Another strategy is superfunding, also known as forward-gifting, which is especially valuable for those looking to remove assets from a taxable estate. Superfunding allows you to take advantage of a rule unique to 529 plans: 529 plans don’t have annual contribution limits, but contributions by individuals other than the student’s parents are considered gifts for federal tax purposes. As such, under the superfunding strategy, you can gift a lump sum of up to five times the amount of the annual gift tax exclusion and avoid the federal gift tax, provided you make an election on your tax return to spread the gift evenly over five years.

A person who chooses to take full advantage of the five-year spread for 529 plans would not be able to give additional gifts to that person during the five-year period without filing a gift tax return, unless the gift tax exclusion were increased, such as through an inflation adjustment in a subsequent year.

How important is the timing of 529 plan withdrawals?

If you’re the account owner, you’ll decide when to withdraw funds from your 529 plan and how much to take out. Here are a few considerations on timing withdrawals:

  • It’s generally wise to wait as long as possible to make 529 plan withdrawals because the longer the money stays in the account, the more time it has to grow tax-deferred.
  • It’s important to coordinate withdrawals with any education tax credits you or your student may qualify for. That’s because you can’t claim a tax credit for tuition that was paid for by using tax-free 529 plan funds.

Learn more: Tax strategies for college savings and gifting

Will 529 plan contributions and distributions affect need-based financial aid?

Yes, though usually not as much as people assume for the FAFSA. The College Scholarship Service (CSS) Profile, meanwhile, counts all 529 plans that list a student as a beneficiary, regardless of the account owner, in its asset calculations. The CSS Profile also includes a sibling’s 529 plan (at least those under age 19 and not yet in college) when determining expected family contribution.

Learn more: FAFSA and the CSS Profile: What are they and how do they work?

Create a 529 plan strategy that’s right for you

Talk to us if you have questions — we can help you determine if a 529 plan makes sense for your family and how these savings plans fit with your long-term financial goals.

Questions to discuss with us

  • How much and how often should I contribute to a 529 plan to reach my education savings goal?
  • Which type of 529 plan makes sense for my family’s situation?
  • Should I use my state’s 529 plan?