- 529 plans offer a tax-free way to save and withdraw funds to pay for qualified education expenses.
- There are two types of 529 plans — college savings accounts, which are available in all 50 states and the District of Columbia, and prepaid tuition accounts, which are less common.
- Anyone may open up a 529 account (including the student themselves), and there are no income limits on who can set up an account.
With the rise of educational expenses, many parents and guardians are turning to college savings accounts to help pay for tuition. While there are several options available to help fund college for yourself or your child, 529 accounts are commonly used because they may offer flexibility and potential tax benefits depending on individual circumstances.
This guide answers important questions around this type of college savings account, including: what is a 529 plan, how does it work, and who is eligible.
Understanding the 529 Plan
529 plans were designed to make it easier to save for college and are typically set up by parents years in advance. They work similarly to regular investment accounts, allowing account holders to invest in a number of different funds (usually mutual funds) that have the potential to grow over time based on market performance.
When it comes time to use the funds, withdrawals are tax-free provided that the money is used for qualified education expenses.
The SECURE Acts of 2019 and 2022 expanded the scope of 529 accounts to include apprenticeship programs, up to $10,000 in student loan debt repayments, and for up to $35,000 of unspent 529 funds to be transferred into a Roth IRA account.[1] Since the One Big Beautiful Bill Act (OBBBA) of 2025, 529 plans can be used to cover qualified expenses for certain credentialing programs as well as college.[2]
Funds in 529 accounts may also be used tax-free to pay for additional expenses such as:
- Room and board
- Books and school supplies
- Technology-related expenses, including computers, internet, and software
- Accessibility equipment for students
- Books and school supplies
- Student loan repayments
However, not all 529 plans are alike. There are two types that you can choose between: college saving plans and prepaid tuition plans.
College Saving Plans
This type of 529 plan offers tax-deferred growth and tax-free withdrawals when the funds are used for qualified educational expenses. The person who opens the account, often a parent, is in charge of this type of plan, and it may be used for either qualified college or K-12 expenses.
Account holders contribute funds, which are then invested in a selection of investment options that you may choose from. How these investments perform will determine how much the account value grows.
One option that many 529 plans offer is to set a target date, which will automatically adjust the investments over time. Investments gradually become more conservative closer to the time the student goes to college.
Prepaid Tuition Plans
The advantage of this plan type is that account owners can lock in the current tuition rates even if they rise in the future. However, it can’t be used for K-12 education expenses, and only a few states and some higher education institutions offer this type of plan.
Prepaid tuition plans work in a similar way to college savings accounts, with the invested funds growing over time and tax-free withdrawals. However, you cannot use the funds to cover the costs of room and board like you can with the college savings plan.
Contribution Limits and Rules
With a 529 plan, there are limits on contribution amounts. They can’t exceed the amount needed to provide for qualified education expenses.
There are also gift tax rules around contributions if they exceed $14,000 during the year.[3]
Key Benefits of 529 Plans
Tax Advantages
An advantage of using a 529 account is that they are exempt from state or federal taxes as long as the money is used for educational purposes.
While contributions to a 529 plan aren’t exempt from federal income tax, many states offer tax deductions or credits. To qualify for these deductions or credits, you may need to invest in your state’s plan. However, some states may allow nonresidents to invest in a 529 plan provided that you’re willing to give up the chance of a tax break in the future.
Flexibility and Use of Funds
While typically used for college expenses, 529 accounts may also help to pay for earlier educational expenses at elementary or secondary schools. You may use up to $20,000 toward educational expenses at public, private, or religious elementary or secondary schools.
529 plans are not just for tuition fees and may include expenses related to computers or technology if they are used primarily by the student during the years enrolled at the school.
Anyone can set up a 529 for a student, including the student themselves, a relative, or a friend. There are also no income restrictions or limits to how many plans you may set up.
How 529 Accounts Compare with Other Savings Options
529 Plans vs. Regular Savings Accounts
One difference is that the deposits and withdrawals are not tax-free with regular savings accounts and are unlikely to grow at the same rate as a 529 plan if the funds are not invested.
However, regular savings accounts are more readily available and have fewer limits on what the funds can be used for. This offers greater flexibility, but it also means that you may have less control over how the funds are used if it’s in your child’s name.
529 Plans vs. Custodial Accounts
Custodial accounts can be set up by a custodian (for example, a parent) who maintains control of how the funds are invested and used. After reaching 18, 21, or 25 (depending on the state), the child will have access to the account and may use the funds however they wish.
This type of account doesn’t provide the same tax incentives that 529 plans do. However, they are also not limited by the same rules, meaning you can use the funds for expenses the 529 account won’t cover.
Common Misconceptions about 529 Plans
Myth: You Can Only Use 529 Plans for College Tuition
Reality: 529 plans can now be used for apprenticeships, K-12 education, and credentialing programs. However, this isn’t the case for prepaid tuition 529 accounts.
Myth: Children Can Spend the Funds However They Want After Reaching 18
Reality: The account holder controls the funds, even if the beneficiary turns 18, so they won’t be able to use the funds for personal items.
Myth: You Will Lose the Money if Your Child Doesn’t Go to College
Reality: The money isn’t lost. There are three options you can take. You may either keep the money in the account in case they change their mind, change the account beneficiary, or make a non-qualified withdrawal.
Understanding Financial Aid Impact
Financial aid helps many students pay for college, but owning a 529 plan may affect how much they can receive. As federal financial aid is “needs-based” and depends on your current income and assets, the amount you have in a 529 account will determine how much, if any, financial aid the student qualifies for.
For students who are dependents, the amount in a 529 account is considered part of the parents’ assets. When calculating potential financial aid amounts, 5.64% of the value [4] will be added to the student’s expected family contributions (EFC).
The amount in a 529 plan is considered the student’s asset if they aren’t dependents. This means that the amount will increase the student’s EFC at a higher rate of 20% of the value.[5]
However, if someone else owns the 529, for example, a grandparent, the amount will not count as an asset that impacts financial aid initially. However, when withdrawals are made, they will be counted as income for the student, which may impact financial aid in the following year.
The Importance of Early Planning
As with any type of investment account, the earlier you set up a 529, the better. Opening an account earlier means that you may have more time to add funds and to watch that money grow over time.
While there are limits on how 529 account funds may be used or withdrawn, the tax-free benefits and flexibility mean that they are a popular option for anyone wanting to help a student with college fees and more.
