What is a 529 plan and how is it used?

A 529 plan is a tax-advantaged savings plan that allows you to pay for education expenses. The scope of 529 plans has increased in recent years to include student loan repayment, apprenticeship programs and even the ability to convert unused funds to a Roth IRA.

The 529 savings plan allows any contributions to the account to grow tax-deferred. Money can be withdrawn tax-free as long as it’s used for qualified education expenses, such as tuition and fees, room and board and books at universities, technical and vocational schools and other qualified institutions. These plans can now also be used to pay for K-12 tuition at private schools and apprenticeship programs.

How do 529 plans work?

A 529 plan allows a participant to set up a tax-advantaged account to allow a beneficiary to use the funds for qualified education expenses. The participant deposits after-tax money into the account. The money in the account can grow tax-deferred and then be tapped tax-free for relevant expenses.

Funding a 529 plan may even reduce your taxes today in some cases. Some states offer tax deductions on contributions, and you can calculate your potential benefit with the help of Vanguard’s 529 state tax deduction calculator. Contributions are made with after-tax money, so they won’t earn you a federal tax deduction.

Who can open a 529 plan?

Anyone can establish a plan and contribute to it. Parents, grandparents and other relatives can all open and contribute to the account. You can even fund your own educational expenses this way. You might not even have to be the owner of the account to claim a tax deduction for your contribution, though it depends on state law.

Various state plans have different benefits, and it can pay to look around and find the best plan for you. You can invest in almost any plan, regardless of where you live. You’ll want to look for low cost, good investment returns and good benefits. The rules for each state plan differ, so you need to know the specific rules for your plan.

What happens when you withdraw from a 529 plan?

When you withdraw the money from your 529 plan, you should use it on education expenses in that same calendar year. Otherwise, you’ll be making an unqualified withdrawal that will cause the IRS to take notice, since you won’t be using the funds immediately. Be sure to keep any receipts, should the IRS request information.

What are the different types of 529 plans?

The 529 plan has two major types: a prepaid tuition plan and an education savings plan. They each serve different needs and offer different investment methods.

• A prepaid tuition plan lets you buy college tuition credits to use in the future at today’s prices. A 529 participant can purchase these credits only at participating colleges and universities for the plan’s beneficiary. These credits can’t be used for room and board and aren’t available for primary and secondary schools.
• An education savings plan is more encompassing, and it allows you to open an investment account that can be tapped in the future for education expenses. These plans pay for tuition and fees, room and board, books and other qualifying costs. This account can generally be used at almost any U.S. college or university and can also be used for K-12 private education and other programs.

Education savings accounts can be invested in many different assets, including potentially high-return options, such as stock funds and the like, as well as lower-return but less risky options, such as bond funds and even money market funds. If it’s invested in the market, however, such as in stock funds or bond funds, its value is not insured by state or federal governments.

Tax and financial aid benefits

The 529 plan can offer several tax and financial aid benefits to participants:

• Grow your contributions on a tax-deferred basis. You won’t pay taxes on any earnings in the account, so long as you maintain the money in the account. You can contribute up to $19,000, or $38,000 if you file jointly, per beneficiary to a 529 plan in 2025 without having to file a gift tax return. Other contribution rules may apply based on the state.
• Tax-free withdrawals for qualified education expenses. Your tax-deferred gains become tax-free gains if you use the money for qualified education expenses.
• Potential state tax deduction. Save on taxes if your state offers a break on deductions. However, you won’t get a state tax deduction for a state where you don’t pay taxes.
• Beneficiaries can change over time. A 529 plan can work for multiple kids, if they don’t need to use the program at the same time. Plan ahead to avoid potentially violating a plan’s rules.
• Student loan repayment. A lifetime total of $10,000 can be used to pay back student loans. As much as another $10,000 can be used to pay loans for a beneficiary’s siblings. Your state might consider this a nonqualified distribution depending on its laws, so check with a tax professional and your state’s distribution guidelines.
• Accounts owned by parents have a lower impact on financial aid. Assets owned by your child can reduce their financial aid eligibility by a large amount. However, a 529 plan isn’t owned by the child, so an account owned by parents can have a smaller impact. As of the 2024-2025 award, grandparents are no longer required to report their financial support.
• Can be rolled over to a Roth IRA. Unused money in a 529 plan that has been open for at least 15 years can be rolled over into a Roth IRA for the beneficiary. There’s a $35,000 lifetime limit on the rollover, though you cannot exceed the annual IRA limit, which is $7,000 in 2025 and $8,000 for those 50 and older.

How to use a 529 plan for multiple children

It’s possible to use a single 529 plan for the benefit of multiple children. For example, if your children’s ages are more than four years apart, you may be able to change the plan’s beneficiary after the first child graduates. If you do this, however, you might want to factor in how much money is left in the plan for the second — or third — child once it’s been tapped by an earlier child.

Using just one plan may also make the 529 plan less valuable for later children. For example, if you switch to more conservative investments as the first child nears college, then it may deprive the second child of potential future returns from more aggressive investments depending on how it’s allocated.

Depending on your situation, it may make more sense to have a separate 529 plan for each child and account for the total cost of college. This approach also allows you to keep better records and may offer you an additional chance for a state tax deduction if your state offers one.

What is and isn’t covered by a 529 plan?

It’s important to understand that you can only access your money on a tax-free basis if you spend it on qualified education expenses. Anything that doesn’t fit the IRS’ interpretation of a qualified expense will likely see the agency slapping a penalty on your withdrawal.

Anything not specified by the IRS in its definition of a qualified expense is likely not covered.

If the funds are being used for higher education, the IRS specifies that qualified expenses must be “related to enrollment or attendance at an eligible post-secondary school.” Moreover, the IRS says that “to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time.”

Eligible expenses include:

• Tuition and fees charged by the institution.
• Textbooks required by enrolled classes.
• Room and board, not to exceed the amount listed by the school as part of the cost of attendance.
• Computers, software and other equipment that are used primarily for educational purposes.
• Apprenticeship costs as long as the program is registered with the U.S. Department of Labor.
• Up to $10,000 in K-12 private education tuition expenses.
• Special needs services, provided that they are incurred as part of attendance at the school.
• Up to $10,000 in student loan repayment.

You will not be able to use a 529 penalty-free to pay for transportation costs at college or extracurricular fees.

How to start a 529 plan

If you’re looking to open a 529 plan, you can do that directly through a state plan. But you also have the option of going through a broker or financial advisor who may be able to assist you with the plan.

• When you go directly to a plan’s website, you need to register, analyze the potential investments and then manage the plan over its lifetime. You’ll be overseeing the plan and dealing with any issues that arise.
• When working with a broker or financial advisor, you can have your agent do the heavy lifting: finding the best state plan for you, selecting the funds and overseeing the program. A broker or advisor may also be able to give you further advice on the program. But you’ll pay for this extra level of service with either a sales commission or higher investment fees.

Both Fidelity Investments and Charles Schwab allow customers to open 529 plans, so they may work especially well if you already have accounts with those companies.

Can you use a 529 plan at any college?

A 529 savings plan can be used at any qualified college nationwide. Most states do not limit the availability to states that sponsored your 529. For example, you might contribute to an account set up with one state’s plan, but still be able to use the funds at any qualified institutions of higher learning.

Prepaid tuition plans, on the other hand, are often more limited in scope. They can usually only be used at specific colleges. Some state prepaid tuition plans allow for the credits to be used at multiple public institutions in the state, but you might not be able to use the credits outside the state.

Double-check to see that your institution qualifies, however, since not every college does.

What happens if my child doesn’t use the 529 plan?

If your child opts not to go to college or a vocational school, the beneficiary can be changed to another family member who might be able to use the money. In general, the plan can continue holding the funds indefinitely as long as it has a living beneficiary listed.

As mentioned above, if the plan has been open for at least 15 years, the funds can be rolled over to a Roth IRA for the beneficiary, with the amount capped at the IRA’s maximum annual contribution limit. This provision has a lifetime cap of $35,000. You’ll have to pay taxes on the earnings, as well as a 10 percent penalty.

However, there are ways to get the money back without paying the 10 percent penalty, although you may need to pay taxes on earnings.

• Scholarship. If the beneficiary received a tax-free scholarship, you can withdraw money to the amount of the scholarship.
• U.S. military academy attendance. This is treated as a scholarship.
• Beneficiary death. If the designated beneficiary dies, the amount can be withdrawn.
• Beneficiary becomes disabled. A physician must certify that the beneficiary can’t complete gainful employment.
• Employer education assistance. If an employer offers assistance, that amount can be withdrawn without paying the penalty.

Bottom line

There are many benefits to establishing a 529 plan. The money is allowed to grow tax-deferred and funds can be withdrawn tax-free for qualified expenses. And if unused, the money can now even help repay student loans or be rolled into a Roth IRA.

To make the most of a 529 plan, you’ll need to fully understand how to use the funds properly, including knowing what is and is not covered. Talk to a financial advisor for guidance if you’re not sure whether a 529 plan is right for your family.

Frequently asked questions

• Do 529 plans have to be used in state?

  There is no requirement that you use a 529 plan in your state of residence. The money can typically be used at any accredited university throughout the United States, including public and private colleges and universities.

• Can a 529 plan cover tuition at private colleges?

  The funds saved in a 529 plan can be used to cover the costs of attending any accredited university across the country. That means both public and private schools.

• What expenses can a 529 plan be used for besides tuition?

  There’s a range of school-related expenses that 529 funds can be used to cover, beyond basic tuition. For instance, the money can be used to pay for room and board, as well as books and supplies.

  The money can also pay for computers and software and other materials needed for school. And more recently, thanks to The Tax Cuts and Jobs Act, which was passed in 2017, 529 plan money can be used to cover tuition costs for private K-12 schools, as well as for repaying up to $10,000 in student loans.