529 plans, set up under Section 529, provide tax-advantaged growth for qualified education expenses. They come in two main forms - prepaid tuition and college savings - and rules around qualified uses, state tax benefits, front-loading contributions, and plan availability vary. Review current IRS guidance and state plan details before choosing.

When Steve and Mary Ellen Jeffers learned they were having twins, Zoe and Zach, they started thinking about college costs. Steve remembered how his parents struggled to pay for his education. Mary Ellen had a different experience - her parents had saved and she finished college without debt. Together they decided to open a 529 plan.

What is a 529 plan?

A 529 plan is a tax-advantaged savings vehicle created under Section 529 of the Internal Revenue Code. States and colleges sponsor plans that let families save for education with tax-free growth on qualified withdrawals.

Two basic types: prepaid and savings

  • Prepaid tuition plans: these let you lock in tuition at participating public (and sometimes private) colleges at today's prices. Fewer states offer prepaid plans now than in the past, and the rules and availability vary by program.
  • College savings plans: these work like investment accounts. You choose among investment options; earnings grow tax free if used for qualified education costs.

What counts as a qualified expense?

Qualified expenses generally include tuition, required fees, room and board (for students enrolled at least half time), books, supplies, and certain equipment. Federal law has also allowed some uses beyond traditional college expenses in recent years - for example, limited K-12 tuition and student loan repayment in some circumstances - but the scope and limits have changed over time, so check current IRS guidance. 1

State tax breaks and plan choice

Many states offer a state income tax deduction or credit for contributions to the state's plan. These incentives vary widely. You can open a plan in any state; you do not have to use your home state's plan, but you may lose a state tax benefit if you choose an out-of-state plan.

Practical considerations

  • Contribution rules, investment options, fees and age-based portfolios differ by plan. Compare costs and performance before you sign up.
  • Contributions are treated as gifts for tax purposes and may trigger gift-tax reporting if large; many families use special five-year front-loading elections when they want to contribute a large lump sum. 2
  • If funds are withdrawn for nonqualified purposes, earnings are subject to income tax and a penalty, though some exceptions apply.

What Steve and Mary Ellen did

They opened a direct-sold college savings 529 plan in their state, chose a diversified age-based investment option, and set up automatic monthly contributions. Their goal was to give Zoe and Zach options when they reach college age.

Bottom line

A 529 plan is a flexible, tax-advantaged way to save for education. Plan details and extra uses of funds have changed since these programs began, so review current IRS guidance (Publication 970) and your state plan documents before you commit.

  1. Confirm current number of states offering prepaid tuition plans and which states still operate them.
  2. Verify current federal allowances for 529 use on K-12 tuition and any per-year limits.
  3. Confirm rules allowing 529 funds to repay student loans and any lifetime limits.
  4. Confirm current gift tax annual exclusion amount and five-year front-loading rules as of 2025.

FAQs about 529 Education

Can 529 funds be used for K–12 tuition?
Federal law has allowed limited use of 529 funds for K-12 tuition in some situations, but the allowance and limits have changed. Check current IRS guidance and your state rules before using funds for K-12.
Do I have to pick my home state's 529 plan?
No. You can open a 529 plan offered by any state, but be aware that state income tax benefits often apply only to contributions to your home state's plan.
What happens if my child gets a scholarship or doesn't use all the money?
You can change the beneficiary to another qualifying family member, keep the funds for later education, or withdraw them. Nonqualified withdrawals typically incur income tax on earnings plus a penalty, though exceptions may apply.
Are there tax advantages at the federal level?
Yes. Earnings in a 529 plan grow federally tax free when used for qualified education expenses; withdrawals for qualified expenses are not subject to federal income tax.
How do I compare plans?
Compare fees, investment options, historical performance, state tax benefits, and customer service. Use official plan disclosure documents and independent comparison sites when evaluating choices.