529 college savings plans
Last updated: February 2023
Planning and saving ahead of time can help parents contribute to their children's education without sacrificing their retirement plans. A 529 college savings plan is a popular savings vehicle that is generally state-sponsored and professionally managed. In some cases, you can automatically contribute money from each paycheck, similar to the way you might contribute to a retirement savings account, such as a 401(k).
Each state has at least one 529 plan, and many offer several options. You can choose a plan from any state, and pay for your child’s college in any state. Some states offer benefits for residents who invest in their home state's 529 plan.
Here's a look at the benefits of using a 529 plan to save for college:
- Flexible use
Money in a 529 plan can be used to pay for certain expenses, like tuition, fees, textbooks, computer equipment and room and board. There are generally no penalties for transferring funds to a different beneficiary. There are also no age limits or requirements. You can start a 529 for an adult, child or even for yourself, if you decided to go back to school. - Potential tax benefits
Withdrawals used for eligible college expenses are generally not subject to state or federal taxes. Some states also offer matching grants for investing in a 529 plan, but you may need to participate in the plan offered by your state of residence to receive the grant. - Menu of investment options
If you’re the one opens the account, you’d be considered the account holder or custodian. This gives you control over investment options, including stock mutual funds, bond mutual funds and money market funds. If, for instance, you open a 529 plan for your child, you might invest more money upfront to jump-start growth, so that it becomes less risky as they approach college age. - Contributions from friends or relatives
Although you might be the custodian of the 529 plan and choose the investment options, friends or relatives can also contribute to your child's 529 plan, helping funds grow over time.
What you can do if there are leftover funds in your 529
What if you saved for college and your child doesn’t end up going? Or, what if it ends up costing less than you expected and you have leftover funds? Fortunately, 529 plans can cover other educational expenses, be withdrawn or transferred to another beneficiary.
Think beyond traditional college.
Any school that participates in a student aid program administered by the Department of Education may qualify for use of 529 funds, according to the Internal Revenue Service (IRS). This may include vocational schools or other secondary educational institutions. You may even be able to use the funds toward K-12 tuition expenses, says the IRS. Before making any withdrawals, it's a good idea to check with your plan's administrator to be sure the school qualifies.
- Covers any qualifying educational expenses
- K-12 tuition
- Vocational or other secondary school tuition
Send another family member to school
You can consider changing the beneficiary of your plan. Your new beneficiary typically needs to be related to your current beneficiary, according to the IRS. That could include another one of your children, a sibling, a niece or nephew, grandchildren or even a son- or daughter-in-law.
- Fully transferrable
- No penalties or taxes
- New beneficiary usually must be a family member of the current beneficiary
Go back to college yourself
You can consider changing the beneficiary of your plan. Your new beneficiary typically needs to be related to your current beneficiary, according to the IRS. That could include another one of your children, a sibling, a niece or nephew, grandchildren or even a son- or daughter-in-law.
- Fully transferrable
- Variety of educational options
- No age limit on using the money
Leave the money alone
You can typically leave the money in your 529 plan invested for as long as you like, according to Forbes. If your child decides later in life to attend college, the 529 funds would still be available. Otherwise, the money could eventually go to another beneficiary down the road.
- Money grows until the current or next beneficiary uses it
- Growth may not keep up with cost of college
Withdraw it (possibly with penalties)
You are typically allowed to withdraw unused money from a 529 plan. Just keep in mind that you'll owe federal and state taxes on the funds, along with an additional 10 percent penalty on your account's earnings, according to the Securities and Exchange Commission (SEC).
- Federal and state taxes
- 10% fee on earnings
- Fees waived under certain circumstances
But there may be special circumstances where penalties are waived. For example, the SEC says if your child receives a scholarship, you may be able to withdraw 529 plan funds without a penalty. It's a good idea to discuss any potential tax or penalty implications with your plan's administrator, prior to withdrawing funds so you know what to expect.
Have questions about starting a 529 plan or how you can use its funds? Talk to your tax or financial professional, or the administrator of your plan, for more information.
Prepaid tuition vs. college savings plans
Prepaid tuition plans and college savings plans are the two types of 529 plans (also called qualified tuition plans), according to the IRS. Both have tax advantages that can help you save for college expenses. Prepaid tuition plans let you purchase college credits, or units, at today's prices to be used in the future. College savings plans let you invest contributions that can be withdrawn later to help pay for qualified tuition expenses.
At least one type of 529 plan is offered in all 50 states, as well as the District of Columbia.
Prepaid tuition plans
A prepaid tuition plan allows you to purchase college units or credits, and in some cases room and board, for future enrollment at a college or university that participates in the plan. According to the Financial Industry Regulatory Authority (FINRA), most prepaid tuition plans allow you to prepay tuition at participating colleges at today's price. With the cost of tuition rising each year, this can provide big savings for your future scholar. Best of all, the U.S. SEC says many prepaid tuition plans are backed by the state.
Keep in mind that many plans require you or your child ("the beneficiary") to be a resident of the state that sponsors the plan. Additionally, prepaid tuition plans have a limited enrollment period each year. Your specific payment plan will be based on your child’s current age and the number of years of tuition you buy.
If your child doesn’t go to college, there are still plenty of options for using the money in your 529 plan. You could pay for vocational school, your own education or another family member’s education. You can even let the 529 plan grow until another family member needs it, or withdraw money with or without a penalty, depending on the circumstances.
Have more questions about starting a 529 plan or how you can use its funds? Talk to your tax or financial professional, or the administrator of your plan, for more information.
529 plan FAQs
A 529 plan is a tax-advantaged investment account designed to cover qualifying education expenses. 529 funds can pay for many types of education, including K-12, vocational school, college and other higher education.
The ways in which 529 plans affect financial aid depends in part on who owns the plan. For instance, if a parent opens a 529 plan for their child, the plan will have less of an impact on financial aid than one owned by a student who is not a dependent. It ultimately depends on the financial aid program and guidelines of the educational institution.
Anyone can be the beneficiary of a 529, regardless of age, as long as they’re a citizen or resident of the United States and have a social security or federal tax ID number.
Anyone can open a 529, as long as they’re a citizen or resident of the United States. You can even open a 529 for yourself.
529 contributions are made after tax, but any earnings are tax-deferred. Qualified withdrawals used to pay for education expenses are tax-exempt. Withdrawals made for non-educational expenses are subject to state and federal taxes. In many states, contributions to a 529 are eligible for a deduction or credit.
In addition to taxes, there is a 10% penalty on earnings withdrawn for non-educational expenses. Penalties are waived under certain circumstances, such as if the beneficiary receives a full scholarship or attends a U.S. military academy.