A 529 plan is a savings investment account designed for education expenses. Named after Section 529 of the Internal Revenue Code, it offers tax efficiency and flexibility in a time of increasing education costs.

Choosing a Plan

Anyone can open a 529 plan on behalf of a beneficiary. Plans grow tax deferred, withdrawals are tax free if used for qualified education-related expenses, and certain states offer tax deductions on contributions. 529 plans have no IRS annual contribution limit, but contributions are subject to gift tax rules, and states set aggregate lifetime maximums.

The cost of a plan is minimal, ranging from no cost to $25 per year, plus fees charged by individual funds.

College Savings Plans and Prepaid Tuition Plans

The two types of 529s are college savings plans and prepaid tuition plans. College savings plans operate as investment accounts similar to 401(k)s in that there is a menu of investment options which typically invest in mutual funds. When ready to matriculate, that money can be used tax free for tuition and other qualified education expenses.

Prepaid tuition plans allow the account owner to lock in current tuition rates for the future. Given constantly rising tuition, this type of plan allows families to potentially pay much lower rates than they otherwise would when their child is ready to attend college. However, funds only apply to specific schools and are not universally applicable.

Qualified education expenses are wide ranging and can include:

• Primary, secondary, college, graduate, or vocational school tuition and fees
• Room and board, books, and school supplies
• Computers, internet, and software used for schoolwork
• Special needs and accessibility equipment

Gifting Strategies

The annual exclusion is the amount you are allowed to give per person, per tax year, before needing to allocate your lifetime exemption. For 2025, for instance, the annual exclusion is $19,000 for individuals and $38,000 for married couples, with no cap on the number of gifts.

When gifting to a 529 plan, you may lump up to five years’ worth of your annual exclusion, which is called “superfunding.” In the 2025 tax year, for example, you may give. up to $95,000 individually or $190,000 per couple without triggering a taxable event. This election spreads the gift evenly over five years, meaning additional annual exclusion gifts to the same beneficiary during that period are not allowed.

As long as the lump sum contribution does not exceed five times the annual exclusion and no further contributions are made for that beneficiary during the five-year timeframe, it will not reduce the donor’s lifetime gift and estate tax exemption.

Saving with a 529 Plan Instead of a Brokerage Account

Investing funds through a traditional brokerage account may be more flexible, but a 529 plan may offer more immediate tax savings, among other differences.

529 Plan

• Education savings account
• Institutionally sponsored
• Limited investment options
• Tax-deferred growth
• Tax-exempt withdrawals for qualified education expenses

Brokerage Account

• General investment account
• Wide selection of investment options
• Taxable gains and dividends
• No tax exemptions
• No contribution limits

Leftover Money

Funds remaining after tuition and qualified expenses have been paid can be withdrawn from the 529 account without a penalty, in certain circumstances:

• Reassigning beneficiaries—Whether or not the beneficiary has graduated, funds can be transferred to another 529 plan. This transfer must be to another family member, but that can be a broad definition and include even first cousins or stepsiblings.
• Rollover to a Roth IRA—Up to $35,000 in someone’s lifetime can be rolled into the beneficiary’s Roth IRA if the 529 has been open at least 15 years, subject to annual Roth contribution limits.
• Student loan payments—Up to $10,000 may be used for the beneficiary and their siblings.
• Nonqualified expenses/withdrawals—There are consequences for using leftover funds for expenses not related to education. You will be subject to taxes and a 10% penalty on the withdrawal earnings.

A Runway for Educational Planning

A 529 plan can offer a clear path when investing in a child’s education. With costs rising every year, planning early can help you prepare for your child’s educational needs, no matter what shape they take.