What Is a 529 Plan?

The average family spent $30,837 on college expenses in 2025, which is a 9% increase from the previous year, according to data compiled by the College Board. Most families covered these costs through a combination of savings, scholarships and grants, and student loans. 

If you’re trying to get a head start on saving for college, a 529 plan is one option to consider. They’re available in most U.S. states, and come with certain tax benefits.

Compare private student loan rates

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan that can be used for educational expenses from K-12 to college and other postsecondary training. The contributions are made with after-tax dollars, so the money grows tax free in the account. Your withdrawals are also tax free if you use them for qualified educational expenses. 

How does a 529 plan work?

Anyone can set up a 529 plan and name themselves, a relative, or a friend as the beneficiary. There are no income restrictions and no limit to the number of plans you can set up. State governments sponsor 529 plans, but many don’t have residency requirements for the account owner or beneficiary. 

The person who opens a 529 plan is the account owner and maintains full control over it. The IRS doesn’t set annual contribution limits on 529 plans, but different states do set lifetime limits per beneficiary. However, if you contribute more than $19,000 a year to one beneficiary, you may have to file a gift tax form.  

Contributed money is typically invested in a portfolio of mutual funds, index funds, or exchange-traded funds (ETFs). You can withdraw money tax free if you use it for qualified educational expenses, like tuition, books and supplies, and room and board. 

What are the different types of 529 plans?

There are two types of 529 plans, and each serves a different purpose:

• Prepaid tuition plan: A prepaid tuition plan lets you buy college credits at today’s prices, protecting you from tuition inflation. Most plans require you to be a resident of the state where you purchase the plan. However, not all states offer 529 plans, and some put age or grade limits on enrollment. You can check with your state to see what it offers. 
• Education savings plan: An education savings plan lets you invest money in mutual funds or ETFs to pay for future educational expenses at any school. You can enroll in these plans through a state or educational institution or an investment company. 

What expenses can you pay for with a 529 plan?

Qualified withdrawals from a 529 plan are tax free, so it’s important to know which expenses qualify. In general, the following expenses are tax- and penalty-free:

• Tuition
• Room and board
• Books and supplies
• Mobility support, therapies, or sensory tools
• Computers or laptops
• Repaying student loans

However, the total withdrawals for the year can’t exceed your child’s adjusted qualified higher education expenses. To figure out this number, you’ll add up your child’s total costs for the year and then subtract any Pell grants, scholarships, tuition discounts, and other assistance programs. 

What are the tax benefits of a 529 plan?

When you contribute money to a 529 plan, the money grows tax free in the account. You also don’t have to pay any federal income taxes when the money is withdrawn as long as it's used for qualified educational expenses. Withdrawals may be exempt from state taxes as well.

Many states offer either state tax credits or income deductions for 529 contributions. And nine states offer tax parity, which means you can claim the deduction or credit for contributing to any state’s plan. These states are:

• Arizona
• Arkansas
• Kansas
• Maine
• Minnesota
• Missouri
• Montana
• Ohio 
• Pennsylvania

What happens if you withdraw funds for non-qualified expenses?

If you use the earnings portion of a 529 plan for non-qualified expenses, it will be taxed as ordinary income. You may also face an additional 10% penalty. 

“One mistake I see is taking out money for expenses that are not qualified expenses,” says Jack Wang, a college financial aid and wealth advisor at the Innovative Advisory Group. “For example, I've seen families take money out for dorm room supplies, which are important, but not a qualified expense for 529 withdrawals.”

Transportation and travel costs are also not considered qualified expenses. For example, if your student needs to fly home for the holidays, you can’t use the funds to pay for plane tickets. And while computers and laptops are covered, smartphones aren’t.

Is a 529 plan right for you?

The biggest risk to watch out for with 529 plans is if your child receives a scholarship or chooses not to attend college, says Michael Rodriguez, a certified financial planner (CFP) at Equanimity Wealth.

“That money could be withdrawn for non-qualified expenses, but the earnings portion of what was invested is taxable and could trigger an additional 10% federal tax,” Rodriguez explains. He notes that there might be state taxes, but that can vary depending on where you live.  

“But just because your child doesn't go to college or gets a scholarship doesn't mean they can't use the funds,” Rodriguez says. “The money in a 529 can be used for eligible vocational programs and other qualified post-secondary education. There may be an opportunity to roll over a portion of the 529 to a Roth IRA option if you meet specific requirements.”