What is a 529 plan?

529 plans are one of the most common ways to save for college education. Learn more about 529 plans below, and the role they can play in funding education for your family.

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A 529 education savings plan is an investment account that offers tax benefits when used toward qualified education expenses for the account beneficiary. Although 529 plans offer federal tax benefits, they are sponsored by individual states. This means that while they are treated the same for federal taxes, state tax treatments can vary. Each state offers different plans with their own investment options, and you do not have to use your home state’s plan.

Benefits of a 529 plan

529 plans offer tax benefits without income phaseouts.

529 plan contributions aren’t deductible for federal income tax purposes, but many state plans offer state income tax deductions for contributions. Earnings grow tax free. When used for qualified education expenses, distributions are federally tax free.

Some options for saving for education (such as Coverdell accounts or education savings bonds) are subject to income limitations to receive the tax benefits, while others (such as taxable accounts and custodial accounts) don’t offer tax benefits. 529 plans offer tax benefits regardless of how much income the account owner has.

The account owner (generally the parent) maintains control over the funds.

The account owner retains control over the funds, so they can ensure those funds are used how they wish.

The beneficiary (generally the child) has dedicated funds for their education.

529 funds are a way to fund the beneficiary’s education and may be able to offset some or all of what they would have had to take out in student loan debt.

The beneficiary can be updated to any eligible family member of the current beneficiary.

The account owner sets up the account for one beneficiary. If the named beneficiary decides not to attend school, the account owner can change the beneficiary to another eligible family member, such as a sibling.

Investment options offer potential growth for funds.

Money contributed to 529 plans can be invested, for example in mutual funds and exchange-traded funds, to allow for potential growth over time. As with any investment, a 529 plan can experience market fluctuations that may affect its value when it’s redeemed.

Contribution limits are high.

Contribution limits are set by the state offering the plan, and all 529 plans prohibit contributions once the account balance reaches a certain point, typically more than $235,000. The actual amount varies depending on the plan.

That said, for states that offer a state income tax deduction for contributions, many limit the amount of annual contributions that can be deducted. Additionally, contributions are treated as gifts, so most people will want to stay within the annual gifting limit (which for 2024 is $18,000 for single filers and $36,000 for married filing jointly).

Anyone can contribute to the account.

In addition to the account owner, anyone is able to contribute to the account. This includes grandparents, family friends, parents and others, regardless of their income. Contributions from friends and family members are treated as gifts to the beneficiary.

For more on the benefits of 529 plans, explore our State of Education Savings: 529 Account Survey.

529 plan FAQs

Types of 529 plans

There are two types of 529 plans — 529 prepaid tuition plans and 529 education savings plans. Although they both offer ways to save money on future education costs, the structure and intent of these plans are very different.

When to set up a 529 education savings plan

With tuition rates continuing to rise, setting aside money every month can make a big difference. And the earlier you can start saving, the more time your investments have the potential to grow. Starting from when your children are born is often a great way to incorporate this goal into your financial strategy, but even if your kids are older, you can still make progress (and potentially get tax benefits) by contributing to a 529. To learn more about how much to save and when to start, visit our guide on saving for your child’s college education.

Using 529 plans for qualified high education expenses

Since the plan’s earnings accumulate tax free, withdrawals are federally income tax free and penalty free, as long as they are used for qualified high education expenses.

Qualified post-secondary education expenses include:

  • Tuition and fees
  • Books
  • Required school supplies
  • Room and board — the beneficiary must be at least a half-time student; includes off-campus housing up to the cost of on-campus room and board
  • Computers and related accessories, such as printers, internet access and educational software primarily used by the beneficiary

How to get started

Trying to understand and plan for future education costs can seem overwhelming and confusing. Your Edward Jones financial advisor can work with you to review your overall financial strategy and determine how to reach all your family’s saving goals, including education.