What is a 529 (College Savings) Plan?

Key Benefits of a 529 Plan

Tax-Free Growth
Investment earnings grow tax-deferred and can be withdrawn tax-free when used for qualified education expenses like tuition, books, fees, and room & board.

Covers K-12 & College
Up to $10,000 per year can be used for tuition at K-12 public, private, or religious schools.

For college (and all post-secondary eligible institutions), 529 funds can be used tax-free for unlimited qualified education expenses, there is no $10,000 annual cap like there is for K–12 tuition.

Qualified Higher Education Expenses (No Annual Limit)

As long as the expense is considered “qualified” by the IRS, you can withdraw as much as needed each year for:

• Tuition & fees (no cap)

• Room & board (if enrolled at least half-time)

• Books & required supplies

• Computers, software, and internet access

• Special needs services

• Certain apprenticeship program costs

• Up to $10,000 (lifetime) toward student loan repayment

Technology Expenses Covered

Tax-free withdrawals also apply to computers, educational software, printers, and internet services if used for school purposes.

Flexible for Families

You can change the beneficiary at any time to another family member without tax penalties this is ideal if one child doesn't use the funds.

Frequently Asked Questions

Who Can Open a 529?

Anyone... parent, grandparent, relative, or friend can open a 529 and name a beneficiary. There are no income limits, and you can open as many accounts as you choose.

Contribution Rules & Limits

Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709 PDF, United States Gift (and Generation-Skipping Transfer) Tax Return.

Two Types of 529 Plans

529 College Savings Plans - Investment-based accounts that grow tax-free and can be used for qualified education expenses.

529 Prepaid Tuition Plans - Lock in today’s tuition rates at participating schools for future use.

You are not restricted to your own state’s plan, many families shop around for the best options, benefits, and fees.

Control of the Account

The person who opens the 529 stays in full control of the funds. Not the beneficiary. They decide when and how the money is used.

Eligible Education Institutions

Funds can be used at most accredited colleges, universities, vocational schools, and trade schools that qualify for federal student aid programs.

How long have 529 plans been around?

Congress created them in 1996 and they are named after section 529 of the Internal Revenue code. “Qualified tuition program” is the legal name.

Is a 529 Plan Right for You?

A 529 plan offers powerful tax advantages, but it isn’t the only strategy for funding education. It should be evaluated alongside other planning options based on your financial goals, tax situation, and timeline.

Do 529 Plans Earn Interest?

Interest vs. Investment Returns

A common question parents have is whether 529 plans earn interest. The short answer is that no, 529 plans do not earn interest in the same way a traditional savings account does.

The longer answer is that they generate returns, so your invested money is growing. The difference is that your earnings (the amount that your contribution grows over time) are based on the investments within the plan. These investment returns can come from interest on bonds, stock dividends, and capital gains from appreciating your investment options.

How Investment Choices Affect Earnings

The account owner, usually a parent, grandparent, or family member, can invest the funds in a 529 plan in various ways. Your choices here will determine how much your 529 account earns. Most 529 plans offer a variety of investment options. These include age-based investment accounts, individual mutual funds, and exchange-traded funds (ETFs).

Like other investments, there is always a balance between risk and reward. For instance, stock-heavy portfolios may offer higher returns but come with greater risk because stock prices tend to be more volatile than other investment types. Bond-focused portfolios, on the other hand, may provide more stability but with lower returns.

Here's a great article to learn more on this topic https://www.savingforcollege.com/article/529-plan-earn-interest

Downsides?

The primary risk in a 529 plan is market risk, meaning the account's value, which is tied to investments like mutual funds, can fluctuate and you could lose money, including your initial principal

Other key risks include:

• Inflation Risk: Your investments might not grow enough to keep pace with the rapidly rising cost of college tuition, diminishing your purchasing power over time.

• Penalty for Non-Qualified Withdrawals: If the funds are not used for qualified educational expenses, the earnings portion of the withdrawal is subject to both federal income tax and a 10% penalty (with some exceptions, such as receiving a scholarship).

• Limited Investment Options: You must choose from the pre-set investment portfolios offered by the specific 529 plan, which limits your control compared to a self-directed investment account.

• Potential Impact on Financial Aid: The account balance is considered a parental asset (if parent-owned) and can affect the student's eligibility for need-based financial aid, although typically at a minimal rate (up to 5.64%).

• State Tax Implications: Not all states offer tax deductions or credits for 529 contributions, and some may recapture tax benefits if you roll over funds to an out-of-state plan or make non-qualified withdrawals.

So what compares to a 529 Plan ??

Here's a short video to summarize how the 529 Plan works and how it could be compared to other tax efficient strategies.