Giving your child a reduced- or no-debt college experience doesn’t have to feel like a far-fetched dream. With a 529 plan, you can help them save for college or other education expenses if they don’t go the 4-year route. Here’s how.
What is a 529 plan?
A 529 plan is a tax-advantaged savings plan that has the potential to grow federal income tax-deferred, with federal income tax-free withdrawals if used for qualified education expenses. Yes, those expenses include college tuition but also tuition at elementary or secondary public, private, or religious schools (up to $10,000 per year).1
How does a 529 plan work?
A 529 plan can be opened by a parent or other adult on behalf of the designated beneficiary. You can make contributions to the 529 account, which can then be invested and withdrawn federal income tax-free if used for qualified education expenses.
Every US state (except for Wyoming), plus the District of Columbia, offers a 529 plan, but an individual can open an account in any state that allows nonresidents to have plans.
Types of 529 plans
There are 2 basic types of 529 plans.
529 savings plan
This more common type of 529 plan offers a tax-advantaged savings account which is for the beneficiary’s qualified education expenses at any college or university, in addition to expenses for public, private, or religious elementary and secondary schools (up to $10,000 per year), eligible apprenticeship programs, and qualified student loan repayments up to $10,000 per beneficiary.1
Prepaid tuition plan
With a prepaid plan, the account owner buys credits at participating colleges or universities (usually public institutions) for the beneficiary’s future tuition and other required fees at today’s rates. It is generally less flexible than a savings plan, as credits can only be used for certain schools and for certain expenses like tuition and fees. Because these are less common, this article focuses mainly on 529 savings plans.
Related: 3 keys to picking a 529 plan
Tax advantages of 529 plans
Tax advantages of 529 savings plans include:
- Federal income tax-deferred growth potential
- Federal income tax-free withdrawals when used to pay qualified education expenses
- Possible state tax deduction or tax credit, depending on eligibility, which could include meeting residence or income requirements. While there is no federal tax deduction, 9 states (Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania) allow taxpayers to claim a state income tax deduction or credit for contributions to 529 plans from any state. (This is known as “tax parity.”)
Other advantages of 529 plans
In addition to the tax advantages of 529 plans, other positives include the following.
No income restrictions on contributions
Individuals are not restricted from making contributions based on income. But there can be income restrictions for state tax advantages in states that offer a credit or deduction.
Anyone can contribute to a 529 plan
Besides parents, common contributors include grandparents and other relatives and friends.
Effect on financial aid is not as extreme as some may think
Many families worry saving for college will hurt their child’s chances of receiving financial aid. Because 529 savings are considered parental assets, they’re factored into federal financial aid formulas at a maximum rate of about 5.6%.3 This means that only up to 5.6% of 529 assets are included in the Student Aid Index (SAI) that’s calculated during the federal financial aid process. That’s far lower than the potential 20% rate assessed on student assets, such as those in a UGMA/UTMA (custodial) account.
Also, a 529 owned by a grandparent or other non-parent is not reportable on the FAFSA financial aid application, which means it does not have an adverse effect on the student’s financial aid eligibility. Note that the CSS Profile, which is required by some colleges and universities, asks how much the student expects to receive from others. Consider consulting with a financial or tax professional regarding your specific circumstances prior to making an investment.
Related: How grandparents can help fund education
Ability to pick a plan in a state other than your home state
You’re free to open a plan in a different state that offers more investment options or lower fees—whether or not your own state does—as long as that state allows out-of-state accountholders.
Flexibility
There are many tax-advantaged uses for 529 plan funds.
- They can cover college tuition, fees, room and board, textbooks, supplies, technology needed for coursework, and special needs expenses, say for adaptive technology or a wheelchair.
- Up to $10,000 per beneficiary can be used to pay back student loan interest and principal.1
- They can cover vocational or trade school expenses and apprenticeship expenses for programs registered with the US Department of Labor.1
- Up to $10,000 per year per beneficiary can pay for K-12 education expenses at public, private, or religious schools. This will increase to $20,000 starting on January 1, 2026.1
- They can support retirement instead by transferring unused 529 funds to a Roth IRA if you meet certain criteria. In general, you can transfer up to a lifetime total of $35,000 (within annual Roth IRA contribution limits) from a 529 that has been maintained for the designated beneficiary for at least 15 years to a Roth IRA. Those funds must come from contributions made to the 529 account at least 5 years prior to the transfer date. The Roth IRA also must be established in the name of the designated beneficiary of the 529 account. Contact a tax pro for your situation.2
Plus, beneficiaries can be changed to a member of the family of the original beneficiary for any reason, such as the original beneficiary deciding not to attend college and not wanting the money rolled over to a Roth IRA.2
Disadvantages of 529 plans
There are a few potential drawbacks to consider.
As with all investments, there is a risk of loss
If you invest in a 529 plan, investment gains are not guaranteed and you could lose money. Before investing, consider the plan’s investment objectives, risks, charges, and expenses.
Some state plans have residency requirements
Not every state allows out-of-state accountholders.
Some plans require minimum deposits, often $250 or less
If you only want to contribute a small amount, check the plan minimums before you open an account.
Lifetime limits on contributions
These limits are in the several-hundred-thousand-dollar range.
Investment options depend on the plan
Unlike a brokerage account with many investment options, you’re likely to be more limited in a 529 plan.
Usable only for education, unless you transfer it to a Roth IRA
Withdrawals for nonqualified expenses are subject to a 10% penalty and ordinary income tax on any earnings. There are some exceptions, including no penalty if the beneficiary receives a scholarship and withdraws up to that amount from the 529 (though they’re still on the hook for tax on the earnings).
Prepaid tuition plans are limiting
They apply only to certain institutions, most are for in-state residents only, few states offer this plan type, and few plans cover expenses such as room and board. But you won’t lose all that money if your child doesn’t attend the school where you took a prepaid tuition plan. You may be able to transfer the account to a sibling, if they’re under a certain age, or even use the funds at a different institution, though you won’t get the discounted rate.
529 accountholders may encounter fees
While they vary by state plan and not every plan charges them, common 529 plan fees include enrollment fees, account maintenance fees, expense ratios, broker commission fees, and administration/management fees. (Psst … Fidelity-managed 529 plans don’t charge annual account fees or require account minimums.)
529 plan contribution limits
The most you can save in a 529 account is the expected cost of higher education—so states have set some limits based on that guideline. On an annual basis, any amount over the annual federal gift-tax exclusion—$19,000 in 2025—would need to be reported to the IRS as a gift and would count against your lifetime gift tax exclusion. Still, 529s allow “superfunding” (aka “accelerated gifting”) through contributions of 5 years’ worth of the annual federal gift tax exclusion to have more time to potentially grow the money in the account.4
Related: 529 contribution limits for 2025
How to open a 529 plan
To open a 529 plan, follow these 4 steps.
1. Do research to pick the right 529 plan for you.
Consider whether you want a prepaid tuition plan versus a 529 savings plan. Look at fees, investment options, and any potential tax benefits to help you determine where to open your account. Weigh whether it makes sense to open a 529 tied to your state or another.
2. Complete the application with your chosen 529 plan provider.
You’ll need your beneficiary’s date of birth and Social Security number. If you’d like to open your 529 account at Fidelity, select whether you’re a customer already, and the application will prefill for you if you are—if not, fill in the requested fields.
3. Fund the account.
Connect your 529 to an account where you keep cash, like a checking or savings account, and then transfer money in.
4. Remember to pick your investments, if applicable.
If you’re offered a choice of investments, consider how much risk you’re willing to take on and when your beneficiary will need the money.
How to use a 529 plan
Ready to start spending 529 plan funds? Here’s what to know about.
Qualified education expenses
Once you make sure the costs you’d like to cover are qualified, you can pay the school directly from the account, move money from the plan into a personal account to pay the school and then reimburse yourself, or distribute funds to the beneficiary. Contact the plan administrator for how to take 529 distributions through your provider. (Psst … Fidelity-managed 529 plans have a direct debit feature that allows schools to pull money from the account when qualified expenses are due.)
Time withdrawals so that you make them in the same year you pay for expenses. Also keep in mind tax incentives like the American Opportunity Tax Credit and the Lifetime Learning Credit, so you don’t use 529 funds to cover expenses for which you’re planning to claim tax credits—the IRS doesn’t allow double-dipping.
Nonqualified expenses
Withdrawals from 529 plans for anything other than qualified education expenses are subject to a 10% penalty and federal income tax.
What to do with excess funds
If there’s more money in the account than your beneficiary needs, you have options.
- Change the account beneficiary to an eligible family member.5
- Under certain conditions, you can transfer 529 assets to a Roth IRA. Work with your tax advisor regarding your specific situation.2