What Is a 529 Account? What It Is, Rules, Pros and Cons
529 plans offer tax-free investment growth and withdrawals for education expenses, but be sure to follow the distribution rules.
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The price of higher education isn't cheap, which means it's a good idea to start saving while kids are learning their ABCs — not while they're studying for their SATs.
For most people, the choice of college savings vehicle is easy: 529 plans offer some great incentives for saving.
What is a 529 plan?
A 529 plan is a special savings account in which the investment growth and withdrawals are tax-free if the money is used for qualified education expenses. You can't deduct contributions to a 529 plan on your federal tax return, but some states also offer a tax deduction for 529 contributions.
What does a 529 account do?
A 529 account stores money you plan to use to pay for several types of education expenses, including:
Tuition, books and curricular materials (including online materials) at a range of post-secondary institutions, as long as the institution is eligible for U.S. Department of Education student aid programs.
Up to $10,000 per year ($20,000 starting in 2026) of tuition, books and curricular materials (including online materials) at private or religious elementary, middle and high schools.
Tuition for tutoring or classes outside of the home if the instructor is not related to the student and is a qualified instructor.
Fees to take PSAT, SAT, ACT or AP exams, or other nationally standardized or college admissions tests.
Fees for dual enrollment in an institution of higher education.
Educational therapies for students with disabilities if the therapy is provided by a licensed or accredited therapist.
Tuition, fees, books, supplies and equipment for a post-secondary credentialing program.
Continuing education to maintain a recognized credential, occupational license or apprenticeship certificate.
How does a 529 plan work?
There are a number of 529 plan rules, particularly around distributions. Here are the main ones you need to know.
1. You can pick a 529 plan from any state
Most states offer at least one 529 plan. You don’t have to invest in your own state’s plan, but many states offer residents a state tax deduction for doing so. (There is no federal tax deduction for 529 contributions.)
If your state doesn’t offer any tax benefits, shop around to find the best plan for you — NerdWallet has a list of all state 529 plans.
The state that sponsors your plan doesn’t have any role in where the child can go to school; students can use the money for qualified expenses in any state.
The exception to that is a specific kind of 529 plan called a prepaid plan, which, as the name implies, allows you to prepay tuition at an in-state, public college, locking in the cost in today’s dollars and at current tuition rates. Only a few states offer prepaid 529 plans.
2. You can freely change beneficiaries on a 529 account
Account owners can change the beneficiary on a 529 account at any time.
If, for example, the child decides to take a different path, you can change the account beneficiary so that the money will go toward a sibling's or other family member's education expenses instead.
If you have leftover funds in one account and more kids headed to college, you can move funds from one child’s 529 account to another without paying any penalties.
If the money leftover isn’t earmarked for another family member’s education, you can roll some of the funds into a Roth IRA in the beneficiary's name, tax- and penalty-free. The limit is $35,000, as long as the 529 account has been open for at least 15 years. Keep in mind that $35,000 is a lifetime cap and the rollovers are subject to the Roth IRA's annual contribution limits, which means you'll need to roll in chunks.
3. The 529 account holder owns the funds
Unlike other college savings vehicles, such as custodial accounts, 529 plans allow the funds to remain under the account owner’s control, meaning you can withdraw the money at any time (though taxes and penalties may apply; more on this below). The beneficiary does not have control over the money in the account, even when they reach the age of majority, which is between the ages of 18 and 21, depending on the state.
» MORE: How to gift 529 contributions
4. Qualified distribution rules are strict
A 529 is specifically for qualified education expenses, though that category extends beyond tuition; it also includes fees, room and board, textbooks, computers and “peripheral equipment” (such as a printer).
Withdrawals made for purposes outside the rules come with a price: Earnings withdrawn for nonqualified expenses are subject to a 10% penalty and ordinary income taxes.
There is no penalty on the principal (the amount contributed).
If you take a withdrawal from a 529, you'll need to file IRS Form 1099-Q.
5. 529 contribution limits are high
Parents, guardians and anyone else who wants to help fund education for a loved one can contribute to a 529 account.
States generally set the contribution limit for their 529 accounts, rather than the IRS setting the limit, as is the case with retirement accounts. The IRS only stipulates that contributions can't be more than the amount required to pay for qualified education expenses.
State maximum limits range from $235,000 to $597,000 and tend to apply per beneficiary.
Federal gift tax limits could come into play if you want to contribute a large amount in a single year.
There are no contribution eligibility requirements or limits based on income.
How to get a 529 plan
You can open a 529 plan directly through your state’s plan website or through some online brokers. Most plans offer age-based investment options that automatically rebalance, taking more risk as a child is young and less as they approach college age.
» Find your state's 529 plan: 529 plans by state
