What Is a 529 Plan?

A 529 plan is a type of investment account with special tax advantages to help people save money to pay for certain education related expenses, including college. These plans, sometimes referred to as “qualified tuition programs,” are typically administered by states.

There are two types of 529 plans:

Education Savings Plans. This is a savings account where you can invest money to pay for qualified education expenses. The beneficiary of the account can be your children, yourself or anyone else you’d like to assist. These 529 plans offer a variety of investment options; the details of these plans will vary state by state. 

Prepaid Tuition Plans. These plans are less common. As the name implies, they allow you to pay the tuition for certain colleges or universities in advance. The idea of prepaying essentially allows you to lock in current tuition rates, even though the beneficiary (i.e., the student) may not actually enter college for several years. Unlike education savings account plans, prepaid tuition plans cannot be used to cover the costs of room and board. 529 prepaid plans can be sponsored by states or by participating higher education institutions. 

How to open a 529 plan?

States, as well as the District of Columbia, administer their own 529 plans, so plan rules, features and contribution limits will vary state to state. When you’re ready to open an account, you can contact the specific state agency that administers the 529 plan. The College Savings Plans Network (CSPN), an affiliate of the National Association of State Treasurers, has a resource center for those interested in learning more about the specifics of each state’s 529 plan(s). 

Do I have to choose my own state’s 529 plan?

No – you can invest in an out-of-state 529 plan. But it’s a good idea to look at your home state’s 529 program first. Some 529 plans offer state residents tax breaks and other benefits that might not be available to out-of-state residents. With that said, you can review other plan options if you don’t like your state’s investment options, fees or other plan features.

Who can open a 529 plan?

U.S. residents who are over the age of 18 can open an account. You must be able to provide a U.S. mailing address and a Social Security number. When you open an account, you can generally name anyone as the beneficiary.

Once you’ve opened a 529 account, you can start contributing to it. Generally, the money in the account can grow tax-free. When you’re ready to use your funds, you can withdraw the money tax-free, so long as it’s being used to cover qualified education expenses. 

What are qualified education expenses?

Qualified education expenses include tuition for K-12 education (up to $10,000 per year per beneficiary), and qualified higher education expenses like college tuition, room and board, books, school supplies and computer equipment. 

In December 2019, Congress expanded the category of qualified educational expenses with the passage of the SECURE Act. Under the act, 529 savings plans can now be used to pay for registered apprenticeships and student loan repayments of up to $10,000.

Are there contribution limits to 529 plans?

The limit to how much you can contribute varies by state. For example, if you were to choose one of Oregon’s 529 plans, you’d have a maximum account balance limit of $400,000 per beneficiary. If you signed up for the Pennsylvania 529 plan, you could contribute up to $511,758 per beneficiary.

Remember, 529 plans are administered by states, so contribution rules and limits will vary.

Are there state income tax benefits for making 529 plan contributions?

The answer depends on where you live and which state plan you have. Over 30 states and the District of Columbia offer a state income tax deduction or credit. Typically, to be eligible for the tax break, you need to be a resident of the state that sponsors your 529 plan. 

There are eight states that don’t offer a tax deduction for residents who are saving in their 529 plans: California, Delaware, Hawaii, Kentucky, Massachusetts, Maine, New Jersey and North Carolina. If you’re a resident of Indiana, Utah or Vermont and contribute to one of their plans, you can receive a state income tax credit (as opposed to a tax deduction).

Are contributions to 529 plans subject to the gift tax?

For tax purposes, 529 plan contributions are considered gifts, which means that the gift tax might apply to your contributions if they exceed a certain amount. For 2020 and 2021, the annual gift tax exclusion is $15,000. Generally, this means that you can contribute up to $15,000 tax free to a family member’s 529 plan.