529s have special provisions that allow individuals to contribute up to five years of gifts in a single year. The contribution must then be equally spread across five years, and a gift tax return will have to be filed. Any additional annual contributions within that same five years that exceed the annual gift exclusion amount would count against the lifetime gift exemption and could be taxable if the donor has used their entire lifetime gift tax exclusion. However, if a donor dies before the five-year period has ended, only a portion of the contribution is considered a completed gift. The remaining amount will be added back to the donor’s estate and subject to any taxes.
For example, if a grandparent decides to superfund her grandchild's 529 (and gives the grandchild no other gifts), she could give up to $90,000 in 2024. That would equate to $18,000 per year for 2024, 2025, 2026, 2027 and 2028. If the annual gift exclusion amount goes up to $18,500 in 2025, she can gift her grandchild an additional $500 in 2025.
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.
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 2025 is $19,000 for single filers and $38,000 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
A 529 education savings plan is considered a parental asset, whether it’s owned by the parent or the dependent student. That means it should have a relatively low impact on a student’s financial aid. Parental assets above a small threshold reduce student aid by less than 6%.
If your child receives a scholarship, you can withdraw up to the scholarship amount from the 529 plan penalty-free. However, the earnings will still be taxable. To avoid taxation, see if you can use the funds for other qualified expenses such as room and board, housing and textbooks.
Outside the option for scholarships, there are many options for repurposing 529 plans, but most still involve funding education, either for the beneficiary or a family member of the beneficiary.
If distributions are used for nonqualified expenses, earnings are subject to federal taxes and a 10% penalty. States may also impose taxes and penalties. Speak with your financial advisor to help make sure you’re not overfunding your plan.
Each 529 plan will offer its own range of investment choices. These options will often include mutual funds, exchange-traded funds and age-based or target-based portfolios. As with any investment account, consider how you feel about risk, the amount of time you have before withdrawing the funds and the return objectives you have for the 529 plan. Remember, you can only change your current 529 plan investments twice per calendar year or when changing the beneficiary.
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.
529 prepaid tuition plans are limited to use only for tuition expenses, cannot offer potential investment growth and have set guidelines for enrollment based on a student’s age. However, with a prepaid tuition plan, the provider or the plan (usually the state or university) bears the risk associated with the plan. Only some states offer prepaid tuition plans, and they're generally limited to residents of the state.
A 529 education savings plan offers investment accounts that can be used toward qualified education expenses for the account beneficiary. There are fewer restrictions for residency, with many states offering 529 savings plans to out-of-state residents. These plans also allow contributions to be used for other costs, in addition to tuition. However, the account owner and beneficiary bear the investment risk with the education savings plan.
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 a child is 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
New laws have been put in place that expand the potential qualified uses of 529 plans. While funds used for these purposes may not be subject to federal income taxes and penalties, note that the state tax treatment of these options can vary, so consult with your tax advisor to ensure you understand all the tax-related issues.
Distributions can be used to pay for:
- Up to $10,000 a year per beneficiary for elementary and secondary school (public, private and religious) tuition expenses.
- Qualified costs associated with apprenticeship programs. Eligible programs can be offered through trade schools and community colleges and must be registered with the U.S. Department of Labor.
- Student loans, up to a lifetime limit of $10,000 per student.
- A rollover to a Roth IRA for the 529 beneficiary, subject to certain criteria and limitations.
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.