529 College Savings Plans

Named after the tax code that created them, 529 college savings plans provide a way to invest for higher education expenses. These state-sponsored plans are typically managed by a professional financial services firm. Although plans differ slightly by state, following are common features:


  • Tax benefits

    Earnings grow tax-deferred, and withdrawals are also federal tax-free when used for qualified higher education expenses. Some states allow tax-exempt withdrawals and/or an upfront tax deduction on contributions.
  • Investment options

    When opening an account, you have a choice between investment portfolios created specifically for that state's plan. Some portfolios have fixed allocations, while others have age-based options, which change asset allocations based on the beneficiary's age or years-to-enrollment.
  • Flexible contributions

    Depending on the plan, contributions can be as little as $250 or as much as $330,000 or more. Anyone can contribute to an account, regardless of income level.
  • Controlled by account owner

    The account owner is the only person who can authorize a distribution from the account—so you know your money will go toward higher education expenses.
  • Changes in beneficiaries

    Concerned that your child won't go to college, or won't use all the money? The beneficiary can be changed tax-free and penalty-free as long as the new beneficiary is a member of the former beneficiary's family.
  • Gift and estate tax benefits

    Contributions of $13,000 per year, or up to $65,000 pro rata over five years, may be excluded from federal gift taxes. Completed gifts are also considered removed from the giver's estate for tax purposes.
  • No impact on credit programs or scholarships

    These accounts do not affect eligibility for a Hope Scholarship or Lifetime Learning Credit.

Things to consider

  • Possible financial aid impact

    The money in 529 college savings plans is considered an asset of the account owner, not the child. So, if the account is owned by a parent, a maximum of 5.64 percent of the investment is considered available for school expenses (versus 20 percent if considered the student's asset).
  • Different states, different programs

    Some state plans do not offer all of the benefits that others do. States may have different residency requirements, contribution limits, program fees, portfolio options, and flexibility.
  • Penalty on non-qualified distributions

    It is possible to withdraw money from your account for non-education purposes, however, the earnings portion of non-qualified withdrawals is subject to income taxes and a 10 percent federal penalty.

Using the Money

The funds in the account can be withdrawn penalty-free if used for qualified expenses such as tuition, room and board, fees, supplies, books, and required equipment. The account owner is the only person eligible to authorize a withdrawal from a 529 account. Changes in beneficiaries can be made tax- and penalty-free as long as the new beneficiary is a member of the former beneficiary's family. Earnings on qualified withdrawals are federal tax-free and may also be state tax-free. Earnings on non-qualified withdrawals are subject to federal and state income taxes, as well as a penalty, which is typically 10 percent.
  • Not FDIC Insured
  • No Bank Guarantee
  • May Lose Value