529 Plan

Two flavors

There are two types of 529 plans:

• Education Savings Plans — the more common type. You contribute money, choose from investment options offered by the plan (usually age-based portfolios that get more conservative as the beneficiary nears college age), and the balance grows tax-free for qualified educational use.
• Prepaid Tuition Plans — let you lock in current tuition rates at participating in-state public schools. Less popular, fewer states offer them, and they typically don't cover room and board.

How it works

Anyone can open a 529 — parents, grandparents, even non-relatives — and name a beneficiary (typically a child). Contributions are made with after-tax dollars, but earnings grow tax-free. Withdrawals used for "qualified education expenses" — tuition, fees, books, supplies, room and board for students enrolled at least half-time, plus computers — aren't taxed.

Many states offer an additional tax deduction or credit on contributions to their state's plan. The deduction is worth checking even if another state's plan has better investment options.

The plan is owned by the contributor, not the beneficiary. Owners can change beneficiaries, withdraw funds (with income tax plus a 10% penalty on earnings if used for non-qualified purposes), or roll funds to another 529 in the family. The owner-controlled structure also keeps 529 assets out of the beneficiary's name for federal financial-aid calculations.

What changed in 2024

The SECURE 2.0 Act introduced a significant update: starting in 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary, subject to caveats. The account must have been open for at least 15 years, the rollover is capped at $35,000 lifetime, and rollovers count against annual Roth contribution limits. This addresses a long-standing concern — overfunding a 529 used to mean either non-qualified withdrawals with penalties or transferring to a relative who could use the funds. Now leftover money has a useful path forward if the beneficiary's plans change.

Limits and considerations

There's no annual federal contribution limit, though contributions count as gifts for gift-tax purposes (the 2025 annual exclusion is $19,000 per donor, per beneficiary, and a five-year "superfunding" rule lets you front-load five years of exclusions in one shot). Lifetime contribution limits are set by each state and typically fall in the $300,000–$550,000 range.