What is a 529 plan?

For many families, planning for future education expenses is a key part of an overall savings strategy. A 529 plan is a state-sponsored investment account that allows you to save money for education expenses. Named after Section 529 of the Internal Revenue Code (IRC), these plans are available to all U.S. residents, regardless of income, and nearly anyone can open or contribute to one.

So, how does a 529 plan work? Nearly every state has at least one plan available, each offering an investment portfolio made up of mutual funds, with some offering Exchange-Traded Funds (ETFs), to grow your money tax-efficiently.

Once you’ve opened a 529 student savings account (or had one opened for you), you can contribute as much or as little to it as you wish, up to the plan’s maximum limits (typically between $300,000 and $500,000, depending on the state). Contributions are made with after-tax dollars, but some states also offer tax deductions or credits in exchange for contributions.

Then, when you’re ready to withdraw funds to use for qualified education expenses, your withdrawals — along with any earnings you’ve made on the account — are tax-free.

What counts as a qualified expense?

Qualified expenses, which enable tax-free withdrawals, include:

• Tuition for college and trade schools
• Tuition for K-12 (up to $10,000 per year, per beneficiary)
• Some eligible apprenticeship programs (must be registered with the U.S. Department of Labor)
• Books and supplies (for college expenses only)
• Computers, software, and internet access (for college expenses only)
• Student loan repayments (up to $10,000 per beneficiary)

You can open a 529 plan if you’re a U.S. resident with a U.S address, are over 18 years old, and have a Social Security or Tax Identification Number. Otherwise, anyone can set up a 529 plan: parents, grandparents, even family friends, as you don’t need to be related to the beneficiary to set one up. You could even set one up for yourself if you plan to return to school, making you both the account owner and the beneficiary.

If you open a 529 savings plan, you can name anyone with a Social Security or Tax ID number as the beneficiary, including a child, grandchild, niece or nephew, or a family friend. If plans change, you can also change the named beneficiary and transfer the account to someone else. To avoid triggering taxes and penalties, however, the beneficiary would have to be a qualifying family member.

There are two main types of 529 plans — education savings plans and prepaid tuition plans — and there are some key differences between the two. Here’s how they work:

529 education savings plan

This type of savings plan allows you to invest your money in mutual funds, ETFs, and bond funds to grow your savings tax-free. However, your investment could go up or down depending on market performance. Also known as a college savings 529, they can be used at most accredited colleges, universities, and vocational schools in the U.S., and even some abroad.

When choosing a savings plan, you should consider investment options, withdrawal restrictions, fees and tax advantages to find the best option for you and your financial situation.

529 prepaid tuition plan

Meanwhile, prepaid tuition plans allow you to prepay tuition for a specific college or college system at today’s rates — essentially locking in the cost ahead of time. 529 tuition plans are typically sponsored by state governments or specific colleges, and the plan usually only covers tuition and mandatory student fees (rather than being able to use the funds for books and internet access, for example). You can generally make payments into this type of plan via a lump sum, a five-year payment plan, or fixed monthly installments.

For most people, a 529 education savings account is a flexible, tax-advantaged way to save for education expenses or use as a college savings account, as it allows you to prepare financially while offering meaningful tax benefits.

Withdrawals from a 529 plan are exempt from federal income tax and often state tax as well — provided they are used for qualified education expenses. More than 30 states also offer state income tax deductions or credits for contributions to a 529 plan, sometimes even allowing you to invest in another state's plan. The benefit amount varies by state.

A 529 plan can also be advantageous for gift and estate planning, especially for parents and grandparents who want to support a family member's education while managing their taxable estate. Contributions are considered gifts for tax purposes when transferred to a 529 plan, meaning you can contribute up to the annual federal gift tax exclusion amount per beneficiary without triggering gift tax. As of 2025, this is $19,000 per person, or $38,000 per couple.

The good thing about a 529 savings plan is that if the beneficiary decides not to attend college, you have a few alternative options, including:

Alternative education types

Other forms of education, including vocational or trade schools and apprenticeship programs, may be eligible for funds from your 529 plan.

Change the beneficiary

You can change the named beneficiary on the account to another qualifying family member, or even to yourself, if eligible.

Pay off tuition and loans

You can use up to $10,000 per year for K-12 tuition, and up to $10,000 (lifetime) per beneficiary to repay student loans.

Withdraw the balance

If you need to, you could withdraw the money for non-education expenses. However, you will pay income tax on the earnings (i.e. not on the original contribution) on top of a 10% federal penalty on the earnings. There may be exceptions to this, for example, if the beneficiary receives a scholarship or joins a U.S. military academy.

Roll over to a Roth IRA

If the 529 plan has been open for more than 15 years and meets other qualifying criteria, you can transfer unused funds to a Roth IRA in the beneficiary’s name, up to the lifetime rollover amount of $35,000 (subject to annual Roth IRA contribution limits).

A 529 plan may not be the right choice for everyone, and, as with any financial product, you should weigh the pros and cons and consider your financial situation and goals.

While 529 plans offer strong tax advantages for educational savings, they aren’t your only option. Now you know how 529 plans work, you could also consider:

Roth IRA

While used predominantly as a retirement account, Roth IRAs can also be used as tools for educational savings. Unlike 529 plans, funds in a Roth IRA (but not earnings) can be withdrawn at any time, tax- and penalty-free. However, annual contribution limits are much lower, at up to $7,000 in 2025 (or $8,000 if you’re age 50 or older).

Coverdell Education Savings Account

Similar to the 529 plan, this account (also known as an ESA) offers tax advantages for education savings, but with more flexibility in investment choices and a broader range of qualified expenses. A downside to this account type is that the funds must be used by the beneficiary before they turn 30, unless the account is transferred to another beneficiary. Otherwise, taxes and penalties may apply to the unused balance.

Savings accounts

A savings account may offer more flexibility as there are no restrictions on what you can spend the money on, and you can choose between different types to suit you, including high-yield savings accounts and CDs, to use as a college fund.

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