Saving for College: 529 College Savings Plans

A 529 plan is a state-sponsored program that allows parents, relatives, and friends to invest in another person's education. Almost all states and the District of Columbia offer some type of 529 plan. However, you don't have to live in a particular state to take advantage of its plan.

Though they're often referred to as college savings plans, you can use them to pay up to $10,000 ($20,000 in 2026) annually for qualifying educational expenses from kindergarten through college and beyond, including:

• Tuition at an elementary school or a secondary public, private, or religious school as well as certain nondegree and credentialing programs
• Required books, online education materials, and supplies
• Tutors or providers offering educational therapy to students with disabilities
• Fees for standardized tests, such as admission or Advanced Placement exams
• Costs for dual enrollment in college courses

Not all states follow the federal definition of qualified education expenses, so read the 529 plan documents carefully before you make a distribution to avoid any surprise taxes or penalties.

It's also important to remember that a 529 account belongs to you. The beneficiary could be your child or someone else, but you remain in charge of the money, while a fund manager assigned by the state manages it. That said, you'll want to select a successor if something should happen to you.

Most 529 plans offer a variety of portfolios with allocations that range from conservative to aggressive, based on historic risk and potential return. You might also be able to choose between an age-based portfolio and a static portfolio. With an age-based portfolio, the fund manager adjusts the asset allocation from more aggressive to conservative as your child nears college age. With a static portfolio, the asset allocation stays the same until you make a change, which you can do twice per calendar year.

Parents, grandparents, and other family members can open a 529 account on behalf of a child—or even an adult—at a brokerage or other financial institution or directly with a state. A person can be the beneficiary of more than one 529 plan at the same time, but you'll want to make sure the combined contributions don't exceed the state's contribution limit.

Most 529 college savings plans allow you to open an account with a small amount—say $25 or $50 a month—if you sign up for an automatic investing plan, with the 529 plan contributions coming directly from your bank or brokerage account. Some employers allow you to make 529 plan contributions automatically as a payroll deduction, so be sure to check if your company offers that benefit.

Earnings in a 529 plan grow federally tax-deferred, which means your money has a chance to compound faster because you don't have to pay taxes on current investment income or capital gains. Even better, withdrawals are tax-free as long as you use the money to pay for qualified education expenses—typically including tuition, books, school supplies, and room and board—though K-12 expenses may be subject to potential state taxation.

Because contributions to a 529 are made after-tax, they're not federally tax deductible. However, you may qualify for state income tax deductions on contributions or state tax exemptions on withdrawals if you invest in your own state's 529 plan or if you live in a "tax parity state" (Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio or Pennsylvania) that allows you to deduct contributions to out-of-state plans as well.

In 2025, typically you can contribute up to $19,000 a year ($38,000 for couples) per beneficiary to one or more 529 college savings plans without incurring the federal gift tax. It's also possible to make a contribution of up to $95,000 ($190,000 for couples) in a single year without incurring the federal gift tax if you treat the gift as occurring over five consecutive years for tax purposes. That said, contributing additional funds to those plans during the five-year period may not trigger the federal gift tax so long as you haven't used your full lifetime gift tax exemption ($13.99 million in 2025 and $15 million in 2026).

States can also put a cap on contributions to a 529 account based on the account value. In other words, once the account value hits the state's account limit, no new contributions will be allowed, but the account can continue to grow beyond the limit.

Saving for college is a wise move, even if you believe your child may qualify for financial aid. Remember, most financial aid comes in the form of loans, which must be repaid with interest.

The federal financial aid formula typically considers 20% of the assets held in a child's name to be available for education expenses. But, as previously mentioned, a 529 plan is considered your asset, not your child's. As a result, up to 5.64% of the money is generally considered available for college expenses.

If another family member (like a grandparent) or nonrelative owns the 529 plan, the account assets won't factor into federal financial aid calculations for the Free Application for Federal Student Aid (FAFSA). However, those assets may affect the College Scholarship Service Profile (CSS/PROFILE^®) calculations used by about 400 schools and scholarships as part of their financial aid process. (Additional financial assets and resources can be considered in the CSS PROFILE that are not considered in the FAFSA, so contact the institution for more information.)

If your child receives a scholarship and you decide to withdraw the money from a 529 plan instead of changing beneficiaries, you'll have to pay ordinary income taxes on any earnings above the amount you contributed. If the withdrawal is more than the amount of the scholarship, you'll have to pay an additional 10% penalty on earnings for the amount in excess of the scholarship. If you withdraw less, the 10% penalty does not apply. (Note that scholarships and grants are tax-free at the federal level if the individual is a candidate for a degree at an eligible institution and the amounts are used for specific expenses, but state tax laws may differ. See IRS Publication 970 for more details.)

If you simply withdraw the money from your account for any nonqualified purpose, you'll have to pay federal income taxes as well as a 10% penalty on the earnings (not on your contribution). Nonqualified 529 plan withdrawals may also be subject to recapture of state tax credits or deductions that you received when making contributions. Consult with a qualified tax advisor for specifics.

If you know your child will attend a public school in your state, you may be able to take advantage of an alternate 529 plan that allows you to prepay tomorrow's college tuition at today's prices.

A 529 prepaid tuition plan provides certain guarantees for tuition and certain expenses at any in-state public school. Some prepaid plans cover tuition, fees, and food and housing (up to a limit based on the cost of attendance), while others only cover tuition and fees.

If your child ends up attending an out-of-state or private school, state prepaid tuition plans can be transferred toward these more expensive options; however, they usually only pay the average in-state tuition cost.

There is also a prepaid 529 plan for a consortium of specific private schools.

If your child decides not to attend college, the funds can be used at any eligible educational institution offering higher education beyond high school, including some overseas, trade or vocational schools eligible to participate in a student aid program run by the U.S. Department of Education. You can see a list of eligible schools on the U.S. Federal Student Aid Code List. Funds can also be used to pay for books, supplies and equipment for apprenticeship programs registered and certified with the Secretary of Labor under the National Apprenticeship Act.

If there's money left in your account after your child graduates, you can:

• Pay for professional development. The 529 plan now covers eligible costs related to professional certifications and continuing education courses.
• Repay student loans. You can withdraw up to $10,000 to pay for qualified student loans on behalf of the beneficiary or their siblings. (Note that student loan interest paid by any portion of the $10,000 as a tax-free withdrawal cannot be deducted for federal taxes.)
• Change the beneficiary. You can change the beneficiary of the 529 plan to another qualified family member—including yourself. The IRS broadly defines the term family member to include everyone from the original beneficiary's siblings and parents to stepsiblings and in-laws.
• Convert leftover funds to a Roth IRA. You may be able to roll over up to $35,000 from a 529 account into a beneficiary's Roth IRA. To do so, the beneficiary must have earned income up to the amount converted to the Roth IRA, the account must have been open for at least 15 years, and rollovers are subject to Roth IRA annual contribution limits. We still need greater clarification of these rules, so be careful if you're considering changing the beneficiary of a 529 plan because that could potentially nullify the 529-to-Roth-IRA rollover for the original beneficiary.

There are a number of resources for financial aid information, including the U.S. Department of Education and College Board. However, it's always a good idea to check with your financial planner and a qualified tax advisor to determine which education savings route is best for you and your family.