What Is a 529 Plan?

Being a parent is a fulfilling experience. But it’s also an expensive one.

As a parent, the thought of paying for your child’s college education may stir up some major anxiety. College isn’t cheap, and it’s difficult to afford without borrowing student loans. 

If you don’t want your child to bear the burden of student debt, you should consider opening a 529 plan.

A 529 plan is an account that you as a parent (or legal guardian or loved one) can use to save for your child’s education.  

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  • 529 savings plans are tax-advantaged accounts that can be used to pay for your child’s education expenses. 
  • Funds aren’t limited to college and can be applied to private school tuition, vocational or trade schools, or apprenticeships.
  • If your child decides to not go to college, the funds will either be taxed or you can roll over up to $35,000 into a Roth IRA.

. . .

529 Basics

529 savings plans are state-sponsored tax-advantaged accounts to be used for qualified education expenses They’re a creative way to save for your child’s future, specifically their education.

The funds can be used at most accredited colleges or universities. Qualified education expenses range from college tuition and fees to housing, meal plans, books, and supplies. 

529 plans aren’t limited to only college though. They can also be applied to apprenticeships and vocational or trade schools, and up to $10,000 annually can be used for K-12 tuition at private schools. 

And as of 2019, you can also use 529 plans to pay for up to $10,000 of student loans if your child does end up borrowing.

RELATED: Parent PLUS Loans: What to Know

Tax Advantages of 529 Plans

One of the biggest advantages (besides stashing cash for college) is the tax benefits that come with a 529 plan. 

The contributions to a 529 plan are made with after-tax dollars. Plus, there is no annual limit to how much you can contribute. 

  • Growth is tax-deferred: You don’t have to pay federal taxes on capital gains, investment income, or dividends earned in the 529 plan. A lot of states (with an income tax) will also allow income deductions or a tax credit for the contributions. 
  • Withdrawals are tax-free: You don’t have to pay taxes on the withdrawals from a 529 plan that are used to pay for qualified education expenses.
  • Gift tax provisions: The contributions are considered gifts, and possibly subject to gift tax. But there are gift tax exclusions of up to $18,000 a year. This can also be advanced for up to five years in a single year, making the maximum exclusion $90,000. 

How To Open a 529 Plan

Every state (except Wyoming) offers a 529 plan. But you aren’t limited to opening the plan in your state. You have the flexibility to choose which state, depending on which plan benefits you. Things like fees, investment options, and tax benefits can be used to decide which plan is best for you.

You will select between a savings plan and a prepaid plan. A savings plan allows you to invest money in the market and a prepaid plan allows you to purchase a portion of tuition at a school.

529 accounts can be opened online, with a broker or financial institution, and can typically be funded with very little money upfront. If you find it all overwhelming, you can also hire a financial advisor. 

Many plans will allow automatic contributions from a bank account for convenience. 

Contribution limits for 529 plans

There are no annual contribution limits for 529 savings plans. This is different from other tax-advantaged products like IRAs and 401(k)s.

But while you aren’t capped on an annual basis, there are maximum contribution balances per beneficiary. This means you are capped at how much you can contribute over the life of the account. Limits range from $235,000 to over $550,000 and depend on the state. 

The limit is based on an estimate of future costs of education in the state where the plan is set up. Usually, this estimate includes a rather highly-priced bachelor's degree — as an FYI.

So, if you want a higher contribution limit you may want to look at opening a 529 plan where college is the most expensive on the whole. 

. . .

529 Plans Per State

StatePlan NameTax Benefit for In-State Contributors?Minimum Contribution
AlabamaCollegeCountsYes$0
AlaskaAlaska 529No$25
ArizonaAZ529Yes$15 or under
ArkansasArkansas Brighter Future 529 PlanYes$25
CaliforniaScholarShare 529No$0
ColoradoCollegeInvestYes$0 – $25, depends on plan
ConnecticutConnecticut Higher Education Trust (CHET)Yes$0
DelawareDE529Yes$0
District of ColumbiaDC College Savings PlanYes$25
FloridaFlorida 529 Savings PlanNo$0
GeorgiaPath2College 529 PlanYes$0
HawaiiHI529No$15
IdahoIDeal 529Yes$25
IllinoisBright Start 529 PlanYes$0
IndianaIndiana529 DirectYes$10
IowaISave 529Yes$25
KansasLearning Quest 529 Education Savings PlanYes$0
KentuckyKY Saves 529No$0
LouisianaLouisiana's 529 STARTYes$10
MaineNextGen 529Yes$25
MarylandMaryland 529Yes$25
MassachusettsU.Fund 529 College Investing PlanYes$0
MichiganMichigan Education Savings Program (MESP)Yes$25
MinnesotaMNSavesYes$25
MississippiMississippi College & Career SavingsYes$25
MissouriMOST 529Yes$0
MontanaAchieve MontanaYes$25
NebraskaNEST 529Yes$0
NevadaNV529 PlansNoDepends on plan (6 choices)
New HampshireUNIQUE College Investing Plan; Fidelity Advisor 529 PlanNo$0
New JerseyNJBESTYes$25
New MexicoThe Education PlanYes$1
New YorkNew York’s 529 College Savings ProgramYes$0
North CarolinaNC 529Yes$25
North DakotaCollege SAVEYes$25
OhioOhio's 529 College AdvantageYes$25
OklahomaOklahoma 529Yes$25
OregonOregon College Savings Plan (OCSP)Yes$25
PennsylvaniaPA 529Yes$0
Rhode IslandCollegeBound SaverYes$0
South CarolinaFuture ScholarYes$0
South DakotaCollegeAccess 529No$250
TennesseeTNStarsNo$25
TexasTexas College Savings PlanNo$25
Utahmy529Yes$0
VermontVT529Yes$25
VirginiaVirginia529Yes$10
WashingtonDreamAhead College Investment PlanNo$25
West VirginiaSMART529Yes$0
WisconsinEdvest 529Yes$25
WyomingNo plan available.NANA

What if My Child Decides to Not Go to College?

A big concern many parents have with opening a 529 plan is whether or not their child will even want to go to college. 

College isn’t for everyone, and the thought of paying penalties and taxes on the withdrawals may be unsettling.

Fortunately, recent tax law recognizes this. As of 2024, your child can jumpstart their retirement and roll up to $35,000 of their 529 plan into a Roth IRA. This is a huge advantage and means your child will not have to pay taxes on their distributions.

Keep in mind that rolling distributions into a Roth IRA may need to be strategically done since the annual limits for IRAs still apply. 

If you choose to directly withdraw the funds, or you have more than $35,000 saved, you can change the beneficiary to another family member, continue saving the funds if there is a change of heart, or withdraw the money.

If you choose to withdraw, you will have to pay a 10% penalty plus taxes on earnings.

FAQs

What is the downside of 529 accounts?

The main downside of a 529 savings plan is that you will incur a 10% penalty and have to pay regular income tax on the earnings if the funds are used for non-qualifed education expenses. 

Some tax deductions are also limited to residents of the state sponsoring the plan, regardless of if your plan is opened in that state.

Additionally, there is investment risk as the funds in the plan are subject to regular market fluctuation. There is also usually limited flexibility in investments, meaning you have to pick from a pre-set investment portfolio. 

What happens to a 529 if your kid doesn’t go to college?

If your child decides to not go to college, you can change the beneficiary to another family member, continue to save the funds for a possible future education, or withdraw the funds (and pay penalties and taxes).

TL;DR: Using 529 College Savings Plans

529 savings plans are fairly flexible, provide some major tax benefits, and have high aggregate contribution limits. If your child doesn’t use the funds for education, you can jump-start their retirement by putting a portion of the funds into a Roth IRA.

These plans are a great way to secure your child’s financial future, by helping them to avoid student loans and save thousands on student loan interest

For more tips on preparing your family for the future, check out these episodes of the Erika Taught Me podcast:

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.