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What is a 529 Plan?

529 plan

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updated: May 8, 2024

Higher education is notoriously expensive, and costs are only expected to rise. For this reason, setting aside cash for college expenses as soon as possible—and in the right investment vehicle so it can grow to where you need it to be—will relieve you of having to come up with the money later. It can also prevent—or minimize—the need for your child to take out student loans.

One tax-advantaged way to achieve your goals is to open a 529 plan. And if you want to use 529 money for primary and secondary school tuition, you can do that, too. Here's what you need to know about these state-sponsored education savings plans.

What is the average cost of college?

Public colleges and universities are subsidized by the state and tend to be considerably less expensive than private institutions that are financed through tuition and donations.

For example, here is the latest per-year average cost for undergraduate tuition, fees, and dormitory room and board for full-time students in degree-granting postsecondary institutions:

Public institutionPrivate institution
Tuition and fees
$ 9,596
Dormitory room
$ 6,944
$ 7,831
$ 5,338
$ 6,090
Total tuition, fees, and room and board

Source: National Center for Education Statistics, 2021-2022 school year.

Beyond these, higher education entails other expenses, such as books and materials, extracurricular activities, and transportation. It all adds up and can be more than you anticipate when you just focus on the basics.

How does a 529 plan work?

Looking at all the involved expenses can leave you worrying that you can't afford to pay for college at all. However, you can make a major dent in the cost, if not pay for everything, with a 529 plan. These state-sponsored programs allow you to save for higher education costs with tax-free investment growth and withdrawals.

The funds must be used for qualified education expenses, such as K-12 tuition (up to $10,000 per year) and higher education tuition and fees. For college, the money can also be used for room and board, books and supplies, computers and software, Internet access, and special-needs equipment. It can also be used to help pay off student loans, with a lifetime limit of $10,000.

Every state in America offers a 529 plan, and each has its own set of fees and investment options.

In general, people open a 529 account sponsored by their state of residence because many offer a state income tax deduction or a tax credit on contributions. However, if you live in Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania, you can enjoy a state income tax break on the money you contribute no matter which state plan you choose.

To identify the best 529 plan for you, consider using a platform such as Backer. This enables you to plug your information into the system and be presented with recommendations based on your needs, location, and circumstances.

529 plan: Pros and cons


  • Tax benefits
  • Easy to open and maintain
  • K-12 tuition option
  • High contribution threshold
  • Rollover-to-Roth-IRA option


  • Plan fees
  • Potential penalties
  • Education expenses only
  • Can impact financial aid
  • Limited investment options

Advantages of 529 plans

Tax benefits

One of the main advantages of a 529 plan is that it reduces your tax liability. Your investments will grow tax-free and—when you withdraw the funds for qualified education expenses—you will not have to pay taxes on the earnings. Depending on the state plan, you may also enjoy tax deductions or tax credits, and sometimes extra incentives. There are estate tax benefits as well, because funds in a 529 plan are considered outside your estate. Contributing money to a beneficiary via a 529 plan can also help you bypass gift tax liabilities.

Easy to open and maintain

When you identify the plan you want, you will fill out the application. This includes selecting your investment options from those that are available through the plan. There is often no specific minimum deposit to open or contribute to the account, though if you choose the automatic investment plan, there may be certain monthly or quarterly minimums. After that, keep an eye on how your investments are doing and make changes if you’re unsatisfied with the results.

K-12 tuition option

Although 529 plans are typically used for college expenses, in many states up to $10,000 per year for private elementary or secondary school tuition. If public schools in your area aren’t what you want them to be, this feature can be very attractive.

High contribution threshold

There aren't any annual contribution limits for a 529 plan, so you can contribute as much as you like until you hit the state’s aggregate contribution amount. The lifetime thresholds vary but are typically in the $500,000 range. Be aware, though, that 529 plan contributions are considered completed gifts for federal tax purposes. In 2024, the allowable annual gift to an individual is $18,000 per donor, up $1,000 since last year.

Rollover-to-Roth IRA option

So what happens if you have money left over after paying for all those educational expenses or the beneficiary never goes to college? As long as the account has been in that person’s name for at least 15 years, you can roll the remaining funds into that beneficiary’s Roth IRA. Starting in 2024, you can transfer up to a lifetime limit of $35,000, tax- and penalty-free.

Disadvantages of 529 plans

Plan fees

There are a variety of fees associated with 529 plans. Each state plan has its own fee structure, so review it carefully so you know how much it can cost. For example, there may be fees for enrollment and account maintenance, and most plans charge for assets under management. For example, if you have $150,000 in the account and the expense ratio is .2%, you would be charged $300 for that year. If you use a broker to make decisions, prepare for a sales fee of a few percentage points of the investment. Some options within each state’s 529 plan are more expensive, depending on investment management.

Potential penalties

If you cash out the funds in the plan for non-qualified expenses, that money will be subject to a 10% penalty on the earnings, state penalties for non-qualified withdrawals, and federal income taxes on the investment gains will be assessed.

Education-expenses requirement

Although 529 plans are created specifically for education costs, this feature may feel restricting. Your child may not go to college, so you will have to make a decision about how to use the money for qualified expenses.

Limited investment options

With any 529 plan you can invest in stock and bond funds, and keep your cash safe in money market accounts. Most states offer target-date mutual funds in which the investments are managed so you have enough money to meet your goals. However, not all states will offer the investment options you may want.

Can impact financial aid

In most cases 529 plans won’t affect the amount the beneficiary receives in federal aid. But if the account is owed by that person, it is considered an asset on the Free Application for Federal Student Aid (FAFSA). In the event the beneficiary is considered an independent student and does not have any dependents other than their spouse, funds in the 529 account can reduce their eligibility for financial aid by up to 20%.

Types of 529 plans

There are two types of 529 plans:

Prepaid tuition plan

You will purchase future higher education credits at today’s prices, for a participating college or university. It can help you avoid falling short if tuition rises more than you expect. If the beneficiary instead goes to an institution that isn’t included, you may not have enough in the account for all the costs.

Education savings plan

This is an investment account where you contribute to the account and use the money for any qualified educational expense, no matter where the beneficiary attends school.

Regarding 529 ownership, you may choose an individual account in which you own the account but select the beneficiary—the child—who will receive the money. As the owner you have the right to change the beneficiary. Or you may open a custodial account where the beneficiary is the account owner, but another person will manage the account until the child reaches age of majority (18, usually).

529 plan transferability rules

Although each 529 plan account can have only a single beneficiary, you can move money from one plan to another as long as that person is a member of the beneficiary's family. So if you have a child for whom you set up a 529 but they don't go to college you can transfer the funds to anyone from a sibling, to a first cousin, to an aunt or uncle (and even yourself) without incurring income taxes or penalties. Most 529 plans allow for one beneficiary change per year.

If there is still money in the 529 account after all education expenses have been paid, starting in 2024, you can move the plan funds tax- and penalty-free—up to a lifetime limit of $35,000—to a Roth IRA owned by the beneficiary. That person will need to have been the 529 beneficiary for at least 15 years.

Examples of college savings 529 plans

New York

New York’s College Savings Program, NY 529, has a target portfolio designed to take the guesswork out of your investment decisions, as well as over a dozen different portfolios from which to choose. As a state resident, you can deduct up to $10,000 from your state taxable income. There are no fees to open the account and no minimum contribution amount to begin. The maximum account balance is $520,000.


Illinois’ Bright Start 529 plan has some nice extras. It currently offers $50 to all babies born or adopted on or after January 1, 2023, to a parent who is a resident of Illinois at the time of birth or adoption to jump start your savings. The tax deduction for single filers is $10,000 per year. The investment options are especially diverse. You can choose from six age-based portfolios, six target portfolios, and 16 individual fund portfolios. There is no enrollment, application or maintenance fees and the maximum account balance is $450,000.


Oregon’s College Savings Plan offers a refundable tax credit for the 2023 tax year of up to $170 or $340 if married filing jointly is available when you make contributions. There are multiple college-enrollment portfolios that adjust to meet your target and many static portfolios from which you can choose. The minimum initial contribution is $25, then will be at least $5 for subsequent contributions. You won’t be charged an enrollment, application or maintenance fee, however there is a .25% state administrative fee and investment fees. The maximum account balance is $400,000.

TIME Stamp: State-sponsored 529 plans offer a tax-advantaged way to save for a child’s education

When you want to pay for a loved one's education, a 529 plan can be an ideal way to make sure the funds are there by the date you expect to need it. You will enjoy tax savings that can help you contribute as much as possible into the account, as the money grows over time. Unused funds can be transferred to another beneficiary or to a Roth IRA for a long-term beneficiary. Just be sure to understand the disadvantages of these plans too.

Frequently asked questions (FAQs)

How can I open a 529 plan?

You can open a 529 plan through a financial advisor or open it directly on the state website. After you identify the 529 plan that you want, you will fill out the paperwork and begin to fund the account.

How much does a 529 plan cost?

The costs associated with a 529 account vary depending on the plan. You may pay fees for management and administration, or according to how the investments are managed—passively or actively. If an investment advisor is managing the account, there can be sales and distribution charges.

Who maintains controls over a 529 plan?

If you open an individual 529 plan, you will own the account and the beneficiary (such as your child) will be the recipient of those funds. If you open a custodial account, you will fund the account but the beneficiary will be both owner and the recipient. As the custodian, you will retain control over the account until your child comes of age.

What are qualified expenses for a 529 plan?

The funds set aside and invested in a 529 plan can be used for education expenses. These include tuition for K – 12 private school, college, and vocational and trade institutions. It can also be used for post-secondary school dormitory and off-campus housing, meal plans, books and supplies (such as computers and software), Internet access, and to repay up to $10,000 in student loans.

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