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 proper education-related expenses, and certain states offer tax deductions on contributions. Although 529 plans do not have annual contribution limits, many states limit the lifetime contribution amount. 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. There is a list of investment options, usually mutual funds, that you can select to grow the account. When ready, that money can be used tax free for tuition and qualified education expenses. Prepaid tuition plans allow the account owner to lock in current tuition rates for the future. Given constantly rising tuition, this plan option allows families to potentially pay much lower rates than they otherwise would when their child is ready to attend college. It is important to note that the funds apply to specific schools and are not universally applicable if purchased.

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 use your gift tax exemption. For 2025, for instance, the annual exclusion is $19,000 for individuals and $38,000 for married couples. When gifting to a 529 plan, you may lump up to five years worth of your annual exclusion, which is called “superfunding.” This means that in the 2025 tax year, you may give up to $95,000 individually or $190,000 per couple without triggering a taxable event. This can be done once every five years; however, it is important to note that it removes one’s ability to give tax free for those next five years. Additionally, as long as the gift-giver does not make any additional contributions to the same beneficiary over the next five years, this lump-sum contribution will not count against their lifetime gift 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
• Self-sponsored
• No limits on 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 of unspent funds can be put into a Roth IRA, based on meeting income and age requirements.
• Student loan payments—Up to $10,000 may be used to pay for student loans 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 earnings portion of the withdrawal.

A Runway for Educational Planning

A 529 plan can offer a clear path when investing in a child’s education. Even if that child does not use all of the funds from the plan, there are options for rolling them over or transferring them to close relatives. With the cost of higher education rising every year, planning early can help you prepare for your child’s educational needs, no matter what shape they take.