> **Definition**
>
> Named for a section of the Internal Revenue Code (IRC), 529 plans are tax-deferred savings plans designed to help pay for college expenses. In some states, qualified withdrawals for these costs aren't subject to federal or state taxes.

## What Is a 529 Plan?

As higher education costs continue to rise and countless Americans are mired in student debt, many parents are turning to tax-advantaged 529 savings plans to help fund their children's education. Named after Section 529 of the Internal Revenue Code (IRC), these plans were originally designed to cover postsecondary education costs.

Their scope has greatly expanded in recent years. In 2017 and 2019, respectively, Congress passed legislation allowing 529 plans to cover the costs of K–12 education and apprenticeship programs. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE 2.0 Act of 2022 permitted 529 funds to be used for student loan repayment and Roth individual retirement account (IRA) contributions. In 2025, the One Big Beautiful Bill Act (OBBBA) made it so 529 plans can be used to pay for credentialing programs.

### Key Takeaways

*   Section 529 plans are tax-advantaged accounts that can be used to pay educational expenses, including K–12 education, apprenticeship programs, credentialing programs, and [student loan](https://www.investopedia.com/the-best-student-loans-11785239) repayment.
*   There are two basic types of 529 plans: educational savings plans and prepaid tuition plans.
*   Section 529 plans are sponsored and run by the 50 states and the District of Columbia.
*   The rules and fees of 529 plans differ from state to state.

## How 529 Plans Work

There are two main types of 529 plans:

1.  College savings plans and prepaid tuition plans. These offer tax-deferred growth, and withdrawals are tax-free when used for qualified education expenses. These plans remain under the control of the donor, usually a parent.
2.  Prepaid tuition plans enable account owners to lock in current tuition rates for future attendance at selected colleges and universities. Given the rising tuition costs, this generally means locking in lower prices for college later on.

Although 529 plans are named for Section 529 of the federal tax code, they're administered by the 50 states and the District of Columbia.

Anyone can open a 529 account, but parents or grandparents typically establish them on behalf of a child or grandchild, the account's [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp). In some states, the person who funds the account may be eligible for a state tax deduction for their contributions.

The money in a 529 plan grows tax-deferred until it's withdrawn. What's more, as long as the money is used for qualified education expenses as defined by the Internal Revenue Service (IRS), withdrawals aren't subject to either state or federal taxes. In addition, some states may offer tax deductions on contributions.

Since tax benefits vary from state to state, you should check the details of any 529 plan to understand the specific tax benefits to which you may be entitled.

## Types of 529 Plans

### College Savings Plans

Of the two types, 529 savings plans are more common. The account holder contributes money to the plan, which is invested in a preset selection of investment options.

Account holders can choose which investments (usually mutual funds) they want to make. How those investments perform determines how much the account value grows over time.

Many 529 plans offer [target-date funds](https://www.investopedia.com/terms/t/target-date_fund.asp), which adjust their assets as the years go by, becoming more conservative as the beneficiary approaches college age. Withdrawals from a 529 savings plan can be used for qualified college and K–12 expenses.

The SECURE Act of 2019 expanded tax-free 529 plan withdrawals to include registered apprenticeship program expenses and up to $10,000 in student loan debt repayment for account beneficiaries and their siblings.

The SECURE Act of 2022, passed as part of the 2023 omnibus funding bill, permits rolling over up to $35,000 of unspent funds in a 529 account into a Roth IRA account. The account must be at least 15 years old to qualify.

The OBBBA of 2025 allows 529 funds to now be used to cover qualified expenses for eligible credentialing programs as well as a broader range of K–12 costs. It also increases the annual withdrawal limit for K–12 from $10,000 to $20,000, applying to taxable years beginning after December 31, 2025.

### Prepaid Tuition Plans

A few states and some higher education institutions offer prepaid tuition plans. They vary, but the general principle is that they allow you to lock in tuition at current rates for a student who may not be attending college for years to come. Prepaid plans aren't available for K–12 education.

As with 529 savings plans, prepaid tuition plans grow in value over time. Eventual withdrawals from the account used to pay tuition aren't taxable. However, unlike savings plans, prepaid tuition plans don't cover the costs of room and board.

Prepaid tuition plans may limit the colleges they can be used for. By contrast, money in a savings plan can be used at almost any eligible institution.

In addition, the money paid into a prepaid tuition plan isn't guaranteed by the federal government and may not be guaranteed by certain states. Be sure you understand all aspects of the prepaid tuition plan before you use it.

> **Fast Fact**
>
> There are no limits on how much you can contribute to a 529 account each year. However, states cap the total amount you can contribute over time, ranging from $235,000 to $621,411.

## Tax Advantages of 529 Plans

Withdrawals from a [529 plan are exempt](https://www.investopedia.com/ask/answers/09/roll-ira-to-529-plan.asp) from federal and state income taxes, provided the money is used for qualified educational expenses. Any other withdrawals are subject to taxes plus a 10% penalty, with exceptions for certain circumstances, such as after death or disability.

Contributions to a 529 plan aren't tax-deductible for federal income tax purposes. However, nearly 40 states provide tax deductions or credits of varying amounts for these contributions.

You need to invest in your home state's plan if you want a state tax deduction or credit. However, some states will allow you to invest in their plans as a nonresident if you're willing to forgo a tax break.

### Gift Tax Implications

As of 2025, the annual [gift tax](https://www.investopedia.com/terms/g/gifttax.asp) exclusion has increased to $19,000, up from $18,000 in 2024. This means that you can give up to $19,000 per year to any individual without it counting against your lifetime gift tax exemption, which has also increased to $13.99 million for single filers and $27.98 million for married couples filing jointly, up from $13.61 million and $27.22 million in 2024, respectively.

This background on gift taxes is important for 529 plans since there are additional tax advantages for those who wish to contribute to the savings of a future college student. You can contribute up to five years' worth of annual gift tax exclusions in a single lump sum without triggering gift tax consequences. For instance, in 2025, a grandparent could make a one-time contribution of $95,000 to their grandchild's 529 plan ($19,000 annual exclusion x five years).

As long as the grandparent doesn't make any additional contributions to the same beneficiary over the next five years, this lump-sum contribution won't count against their lifetime gift tax exemption.  

## Benefits and Potential Drawbacks of 529 Plans

## 529 Plans vs. Brokerage Accounts

529 Plan

*   Education savings account
    
*   Institutionally-sponsored
    
*   Limited investment options
    
*   Tax-deferred growth
    
*   Tax-exempt withdrawals for qualified education expenses
    
*   Aggregate lifetime contribution limits
    

Brokerage Account

*   General investment account
    
*   Self-sponsored
    
*   No limits on investment options
    
*   Gains and dividends are taxed
    
*   No tax-exemptions
    
*   No contribution limits
    

529 plans and individual [brokerage accounts](https://www.investopedia.com/terms/b/brokerageaccount.asp) are two popular options when saving for college. A 529 plan is a tax-advantaged investment account designed specifically for education expenses. By contrast, a brokerage account is a general-purpose investment account with no specific tax benefits for education savings.

Section 529 plans are sponsored by a state or financial institution and have limited investment options, often through a menu of mutual funds or exchange-traded funds (ETFs). Your selection may [include age-based options](https://www.investopedia.com/using-etfs-in-clients-529-plans-and-education-savings-conversations-11775214) that automatically adjust the asset allocation as the beneficiary approaches college age.

They also offer tax-deferred growth and tax-free withdrawals for qualified education expenses, including tuition, fees, books, and room and board. Some states offer additional tax benefits, such as deductions or credits for contributions to in-state 529 plans. There are no annual contribution limits, but there are limits on the total in a given account, from $235,000 in Georgia to $621,411 in New Hampshire.

Meanwhile, brokerage accounts offer a wide range of investment options, including individual stocks, bonds, mutual funds, and ETFs. There are no contribution limits, but gains and dividends are taxable in the current period. There are also no additional benefits to using the proceeds for educational purposes.

Suppose your child doesn't end up going to college. In that case, funds in a 529 plan can be transferred to another qualifying family member or used for other education expenses, such as apprenticeships, graduate school, credentialing programs, or student loan repayments (up to $10,000). Nonqualified withdrawals or transfers, however, are fully taxable and may carry penalties. Brokerage account funds can be used for any purpose, including education, without restrictions or penalties.

## 529 Plan Transferability Rules

Section 529 plans have specific transferability rules governed by the federal tax code. The owner may transfer funds to another 529 plan once per year unless a beneficiary change is involved. You aren't required to change plans to change beneficiaries. You may transfer the plan to another family member, defined as one of the following:

*   Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
*   Brother, sister, stepbrother, or stepsister
*   Father or mother or ancestor of either
*   Stepfather or stepmother
*   Son or daughter of a brother or sister
*   Brother or sister of a father or mother
*   Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
*   The spouse of any individual listed above
*   First cousin  
    

> **Tip**
>
> You aren't restricted to investing in your state's 529 plan, but doing so may get you a tax break. Be sure to check out your state's plan before making a decision.

## Additional Tips for 529 Plans

As with other kinds of investing, the earlier you get started, the better. With a 529 plan, your money will have more time to grow and compound the sooner it's [opened and funded](https://www.investopedia.com/can-you-fund-a-529-plan-with-a-cd-5270289). Prepaid tuition plans offer the advantage of locking in current tuition rates, potentially saving you money compared with future prices, as many schools increase tuition annually.

If you have leftover funds in a 529 plan, such as when the beneficiary receives a significant scholarship or chooses not to go to college, you have several options. You can change the beneficiary to another qualifying relative, keep the current beneficiary in case they decide to pursue higher education later or attend graduate school, or use up to $10,000 to repay the original beneficiary's or their siblings' federal or private student loans.

You can also [transfer unused funds](https://www.investopedia.com/529-can-help-with-their-retirement-11738730) of up to $35,000 to a [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp) if your account meets the necessary requirements. Lastly, you can always withdraw the money, although you will be subject to taxes and a 10% penalty on the earnings portion of the withdrawal.

## How Much Does a 529 Plan Cost?

States often charge an annual maintenance fee for a 529 plan, which ranges from $0 to $25. In addition, if you bought your 529 plan through a broker or advisor, they may charge you an additional fee for the assets under management. The individual investments and funds inside your 529 may also charge ongoing fees. Look for low-cost mutual funds and ETFs to keep management fees low.

## Who Maintains Control Over a 529 Plan?

A 529 plan is technically a [custodial account](https://www.investopedia.com/terms/c/custodialaccount.asp), as an adult custodian controls the funds for the benefit of a minor. The beneficiary can assume control over the 529 once they turn 18. However, the funds must still be used for qualifying education expenses.

## What Are Qualified Expenses for a 529 Plan?

Qualified expenses for a 529 plan can include the following:

*   Tuition and fees
*   Books and school supplies
*   Room and board
*   Computers, internet, and software used for schoolwork (student attendance required)
*   Special needs and accessibility equipment for students
*   Student loan payments

Depending on the education level, certain costs won't be considered qualified education expenses.  

## The Bottom Line

A 529 plan gives you a tax-advantaged account to save for educational expenses from kindergarten to graduate school, in addition to apprenticeships and credentialing programs. There are a variety of 529 plans available, offering plenty of flexibility alongside the potential for tax-advantaged growth.  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Publication 970 (2024), Tax Benefits for Education](https://www.irs.gov/publications/p970)."
>     
> 2.  Congress.gov. "[SECURE 2.0 of 2022 Act](https://www.congress.gov/bill/117th-congress/house-bill/2954/text)."
>     
> 3.  Congress.gov. "[H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019](https://www.congress.gov/bill/116th-congress/house-bill/1994/text)."
>     
> 4.  Congress.gov. "[H.R.1 - One Big Beautiful Bill Act](https://www.congress.gov/bill/119th-congress/house-bill/1/text)."
>     
> 5.  Finaid. "[Section 529 Plans](https://finaid.org/savings/529plans/)."
>     
> 6.  529 Savings Plans Network. "[What Is a 529 Plan?](https://www.collegesavings.org/what-is-529)"
>     
> 7.  National Association of State Treasurers. "[College Savings](https://nast.org/college-savings/)."
>     
> 8.  Internal Revenue Service. "[529 Plans: Questions and Answers](https://www.irs.gov/newsroom/529-plans-questions-and-answers)."
>     
> 9.  Saving for College. "[Are 529 Contributions Tax Deductible? State-by-State Guide and What It’s Worth](https://www.savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth)."
>     
> 10.  U.S. Securities and Exchange Commission. "[An Introduction to 529 Plans](https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html)."
>      
> 11.  Congress.gov. "[H.R. 2617 - Consolidated Appropriations Act, 2023](https://www.congress.gov/bill/117th-congress/house-bill/2617/text)."
>      
> 12.  my529. "[SECURE Act 2.0](https://my529.org/secure-act-2-0/)."
>      
> 13.  529 College Savings Plan. "[529 Plan Comparison by State](https://www.collegesavings.org/find-my-states-529-plan/)."
>      
> 14.  Internal Revenue Service. "[IRS Releases Tax Inflation Adjustments for Tax Year 2025](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025)."
>      
> 15.  Internal Revenue Service. "[Gift Tax](https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax)."
>      
> 16.  Saving for College. "[529 Contribution Limits 2025: Maximums by State, Gift Tax Exclusion, and More](https://www.savingforcollege.com/article/maximum-529-plan-contribution-limits-by-state)."
>      
> 17.  Saving for College. "[529 to Roth IRA: Rollover Rules, Conversion Guide, and FAQs](https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira)."
>      
> 18.  Saving for College. "[529 Fee Study](https://www.savingforcollege.com/529_fee_study/)."