Saving for College: How 529 Plans Work
A 529 plan is a tax-advantaged account for education costs, from college to K-12 tuition. Here's how 529 plans work, their tax benefits, what they cover, how to choose one, and what happens if your child doesn't go to college.
By Pond.com editors Updated 2 min read
Quick answer
- A 529 plan is an investment account for education, offered by states.
- Money grows tax-free, and withdrawals are tax-free for qualified education costs.
- Many states give a state tax deduction or credit for contributions to their own plan.
- From 2026, up to $20,000 a year can be used tax-free for K-12 tuition and some other school costs.
- Unused money can be moved to another family member, and some can be rolled into a Roth IRA under certain rules.
College costs have climbed for decades, and starting to save early, even small amounts, can make a big difference. For most families, a 529 plan is the simplest tax-advantaged way to do it.
This article is general information, not tax or investment advice. Rules vary by state and change over time; check your plan and IRS.gov.
How 529 plans work
- You open an account, naming a beneficiary such as your child or grandchild.
- You contribute whenever you like; anyone can contribute.
- You choose investments, often age-based portfolios that get more cautious as college nears.
- Withdrawals are tax-free when used for qualified education costs.
The tax benefits
- Tax-free growth on investments
- Tax-free withdrawals for qualified costs
- State tax breaks: many states offer a deduction or credit for contributions to their own plan
What you can use it for
| Use | Notes |
|---|---|
| College and university | Tuition, fees, books, supplies, and room and board for students enrolled at least half time |
| Trade schools and apprenticeships | Eligible programs |
| K-12 school | From 2026, up to $20,000 a year for tuition and a wider range of school costs |
| Student loans | Up to $10,000 over a lifetime |
| Roth IRA rollover | Up to $35,000 over a lifetime, if the account has been open at least 15 years and other rules are met |
Choosing a plan
- Check your state's tax benefit first.
- Compare fees, which vary a lot between plans.
- Look at investment options, especially low-cost, age-based portfolios.
- Direct-sold plans usually cost less than plans sold through advisers.
How much to save
There's no single right number. Many families aim to cover part of the cost and use other savings, scholarships, work and aid for the rest. Automatic monthly contributions, even $50 or $100, add up over 18 years.
See how your money could grow Try different amounts, returns and time frames. Open calculatorBefore you put college first
Make sure your own finances are on track. You can borrow for college, but not for retirement. Many experts suggest getting your employer 401(k) match and an emergency fund in place first. See how to start investing.
Common questions
You can change the beneficiary to another family member, keep the money for later, or use it for trade school or apprenticeships. Non-qualified withdrawals are taxed and usually have a 10% penalty on the earnings. Under certain rules, up to $35,000 over a lifetime can be rolled into the beneficiary's Roth IRA.
No, you can use any state's plan. But your own state may offer a tax deduction or credit only for its plan, so compare that benefit with other plans' fees and investments.
A parent-owned 529 plan is counted as a parent asset on the FAFSA, which has a relatively small effect on aid. Rules for plans owned by grandparents have become more favorable in recent years.