529 college savings plans: how they work
State-sponsored tax-advantaged accounts for education. Tax breaks, contribution limits, and recent SECURE 2.0 changes.
- 529 Plan
- A state-sponsored tax-advantaged investment account for qualified education expenses. Earnings grow tax-free; qualified withdrawals are tax-free.
- Example: $10,000/year for 18 years at 7% in a 529 grows to $336,000 with no federal tax on growth.
- Qualified Education Expenses
- Tuition, fees, books, supplies, and room/board for accredited college; up to $10,000/year for K-12 tuition; up to $10,000 lifetime for student loan repayment.
- Example: Computers and internet access used for school count; private high school tuition counts up to $10K/year.
- Account Owner vs Beneficiary
- The owner controls the account and chooses the beneficiary (usually a child). The owner can change the beneficiary or use funds for themselves with tax penalty.
- Example: If your first child does not need all the funds, change the beneficiary to a sibling, niece, or even yourself.
529 plans are the standard tax-advantaged vehicle for college savings. They are state-sponsored but you do not have to use your home state — you can pick any state plan, though many states give an income tax deduction for using their own.
How the tax treatment works
Contributions are made with after-tax dollars (no federal deduction). Growth is federal tax-free. Withdrawals for qualified education expenses are also federal tax-free. Many states offer a deduction or credit for contributions to their own plan.
2026 contribution limits
There is no annual federal contribution limit, but contributions over $19,000 per donor per year ($38,000 for couples) trigger gift-tax considerations. A unique 529 feature: front-load 5 years of contributions in one year ($95,000 single, $190,000 couple) for early compound growth.
SECURE 2.0 Roth conversion
New since 2024: leftover 529 funds can be rolled to a Roth IRA for the beneficiary, up to $35,000 lifetime. The 529 must have been open 15+ years; the beneficiary must have earned income equal to the rollover. This eliminates the historical concern of "what if my kid gets a scholarship and we have leftover funds."
Investment options
Most 529 plans offer age-based portfolios that automatically shift from stocks to bonds as the beneficiary approaches college age. Static index-fund options are also typically available. Avoid plans with expense ratios above 0.30% — Utah, New York, and Vanguard-managed plans are standard low-cost picks regardless of your home state.
Coordination with financial aid
Parent-owned 529s are assessed at up to 5.64% on FAFSA — much better than student-owned assets (20%). Grandparent-owned 529s are no longer counted at all on FAFSA as of 2024 (FAFSA Simplification Act), making them a powerful planning tool.
Frequently asked questions
What if my child does not go to college?
+
Should I use my home state plan?
+
How much should I save?
+
Plug in your own amounts with our free calculators.