529 Plan: Everything You Need to Know While Saving for College

Some reports show that college tuition costs have increased significantly over the years. According to the Education Data Initiative, the average cost of tuition and fees has risen by 93.2% since the 2005-2006 academic year. Another report shows that college tuition has increased by 36.8% since 2010. This makes one thing clear – if higher education is on your agenda, you need to start saving for it as early as possible.  

Parents, grandparents, relatives, and even friends may want to provide their children and other loved little ones with the financial support needed to succeed in life. If you are in the same boat, a 529 plan can help. Let’s know more about the 529 plan benefits and features, and how to use the 529 plan for education.

What is a 529 plan, and how does it work?

A 529 plan is a tax-advantaged education savings account. You can use it to save for future education expenses, such as K-12, college, and graduate school. When you contribute money to the 529, the contributions are invested on behalf of the beneficiary. For example, if you have children, you would be investing on their behalf. The account can also be used for a grandchild. Most 529 plans offer a selection of investment options, such as mutual funds. 

There are many tax benefits of a 529 plan. The contributions made to a 529 are made with after-tax dollars. Once the money is in the account, it grows on a tax-deferred basis. Further, qualified withdrawals are generally tax-free, and you do not need to pay federal income tax on investment earnings, provided the funds are used for eligible education expenses. 

529 plan benefits and features:

To know how to use a 529 plan for education, you need to understand its benefits and features. Let’s get into the details:

1. High contribution limits

In 2026, an individual can contribute up to $19,000 per beneficiary each year without triggering federal gift tax rules. For married couples who choose to split gifts, this doubles to $38,000 per beneficiary annually. 

For those who want to or can contribute more, 529 plans offer an additional benefit known as super-funding. This 529 college savings plan advantage allows you to contribute up to five years’ worth of annual gift tax exclusions at once. In 2026, an individual can contribute as much as $95,000 to a beneficiary’s 529 plan in a single year without triggering federal gift taxes.

2. Account ownership remains with the contributor

An important feature of the account you must know is that it is opened for the benefit of a student. However, it is the account owner, not the student, who maintains control of the assets. So, say you, as a parent or grandparent, invest in a 529. In this case, you get to decide how the money is invested and when withdrawals are made, not your children or grandchildren.

3. 529s can be used for qualified expenses only

The tax benefits of a 529 plan apply only when the money is used for qualified education expenses. If withdrawals are used for purposes that do not qualify, you could owe taxes. You may now be wondering what qualifies as a valid expense. Here’s a list of what eligible expenses generally include:

• Cost of required textbooks
• Cost of study supplies
• Tuition costs for K-12 students attending eligible public, private, or religious schools
• College, graduate school, trade school, and other approved education program tuition and fees.
• Housing and meal expenses for students enrolled at least half-time.
• Fees for entrance exams, college admission tests, and Advanced Placement (AP) exams.
• Educational tutoring and specialized learning support for students with disabilities or special needs.
• Expenses for dual-enrollment courses that allow high school students to earn college credits.
• Computers, educational software, the Internet, and other services that may be needed for schoolwork.
• Repayment of student loans, up to a $10,000 per beneficiary in a lifetime.

Some examples of expenses that are generally not considered qualified include: 

• Transportation and commuting costs
• Medical bills
• Sports-related expenses
• Personal purchases

4. Tax-free withdrawals and tax-deferred growth

The tax benefits of a 529 plan are the greatest appeal of the account. 529 plans offer a combination of tax-deferred growth and tax-free qualified withdrawals. When you invest money in a 529 plan, your contributions have the potential to grow over time. These earnings are tax-deferred. And as long as the withdrawals are used for eligible educational costs, you can withdraw both your original contributions and any investment profits without paying federal income taxes.

5. Different types of 529s

There are two types of 529s – education savings plans and prepaid tuition plans. An education savings plan is the more common option. With this type of 529 plan, you make contributions using after-tax dollars and invest the money in the investment options offered by the plan. The account has the potential to grow over time. Later, when the beneficiary wants to use the funds for qualified education expenses, you can withdraw them tax-free. 

A prepaid tuition plan does not invest your money for future growth. With this type of plan, you essentially purchase future tuition credits right now. These plans are typically linked to in-state public colleges and universities and allow you to lock in current tuition rates. This way, you can safeguard yourself against future tuition inflation. If the beneficiary decides to attend a different institution, such as a private college or an eligible out-of-state school, the value of the prepaid tuition benefits can be transferred or applied toward those costs.

Both types of 529 plans are widely used. You can choose the best option for yourself after consulting a financial advisor.

6. Option to transfer to a Roth IRA

A lesser-known advantage of a 529 college savings plan is that you can transfer the account to an Individual Retirement Account (IRA). As per recent rule changes under the SECURE 2.0 Act, eligible beneficiaries may be able to roll over unused 529 plan funds into a Roth IRA, subject to certain conditions and limits. Currently, you can transfer up to $35,000 from a 529 plan to the beneficiary’s Roth IRA over time. And, you can do this without triggering taxes or penalties. You just need to meet some applicable requirements.

Often, children may qualify for scholarships and not need money from a 529. In this case, the money is not wasted or subject to tax. You can simply redirect the money to other goals.  

7. Option to transfer to another beneficiary

As mentioned in the previous point, sometimes the child you are saving for may not need the money. They have won a sports or academic scholarship. Sometimes kids may also decide not to go to college at all. Whatever the reason, if the beneficiary decides not to use the funds for education-related expenses, they do not go to waste.

As the account owner, you can change the beneficiary to any other eligible family member. This can be another child, grandchild, sibling, parent, cousin, niece, nephew, in-law, spouse, or several other qualifying relatives.

How to use a 529 plan for education?

First, you open an account and name a beneficiary, such as your child or grandchild. Many plans allow you to get started with a very small initial contribution, sometimes as little as $1.

Once the account is open, you can choose from the investment options offered by the plan. Any profits that you earn remain in the account where they can continue to grow over time. As you make additional contributions, those funds are also invested and reinvested within the plan.

One useful feature of a 529 plan is that anyone can contribute to it. Parents usually contribute, but grandparents, friends, relatives, and others can also add money to the account as gifts. However, the account owner must generally be a U.S. citizen or resident alien. 

Over time, the account can grow and be used to pay for qualified education expenses, like college tuition, room and board, vocational courses, books, supplies, and other eligible educational expenses. In some cases, 529 funds can even be used for approved international schools and certain non-degree or credentialing programs.

When it comes time to use the money, you can withdraw funds from the account at any time. However, to receive the full tax benefits of the plan, the withdrawals should be used for qualified education expenses. If the money is spent on non-qualified expenses, the earnings portion of the withdrawal may be subject to federal income taxes, applicable state taxes, and an additional 10% federal penalty.

And the account can also be used if the beneficiary decides to study abroad, provided the educational institution qualifies, and some basic rules are met. For instance, students enrolled at least half-time can use 529 funds for eligible room-and-board expenses. However, it is important to note that while many education-related expenses qualify for study abroad, some costs do not. For example, travel expenses associated with studying abroad are generally not covered by 529 plans.

Start a 529 plan to secure your child’s future

A 529 plan is one of the most useful tools out there, and it’s the right choice if you want to prepare for future education expenses. While the tax benefits of a 529 plan are often the biggest draw, they are far from the only reason to consider one. 

A 529 plan lets you save for education expenses in a structured manner. It ensures that money set aside for education is not used on other financial goals. It creates a clear separation, which makes it easier to stay on track.

The account is simple and convenient. Once you open the plan and choose your investments, you can contribute regularly and allow your savings to grow over time. The funds can be used for a wide range of qualified education expenses. In fact, they can be used for both domestic and eligible international educational institutions. And, perhaps most importantly, parents do not have to shoulder the entire burden alone. Grandparents, relatives, and even family friends can contribute to a 529 plan.

If you are considering a 529 plan, speaking with a financial advisor can help you understand your options. Visit our financial advisor directory to connect with a financial advisor who can help you understand how to use a 529 plan for education. 

Frequently Asked Questions (FAQs) about 529 plan benefits and features

1. What are three advantages of a 529 college savings plan?

A 529 plan offers several benefits, but three of the biggest advantages are its tax benefits, growth potential, and flexibility.

• A 529 plan provides tax advantages. Your investments can grow on a tax-deferred basis, and qualified withdrawals for eligible education expenses are generally tax-free.
• 529 plans offer a variety of investment options that can help your savings grow over time through compounding.
• Third, anyone can contribute to the account, including parents, grandparents, relatives, and friends.

2. What happens to my money if my child decides not to go to college?

You can transfer the account to another family member who can use the funds for qualified education expenses. You may also be able to transfer the funds to the beneficiary’s Roth IRA. A financial advisor can help you understand these options.

3. Can I contribute to my godchild’s 529 plan?

Yes, you can contribute to your godchild’s 529 plan if you want to help the child and their parents financially. A 529 plan is not limited to contributions from parents alone. Grandparents, relatives, family friends, godparents, and others can contribute to a beneficiary’s 529 plan.