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What You Need to Know About 529 College Savings Plans

May 29, 2020

Happy 529 Day! (That's May 29 of course.) 529 plans are one of the most popular ways to save for college. In addition to their high investment limits, flexibility, and tax breaks, they usually have little impact on your eligibility for federal financial aid. Read on to learn more from CollegeData, a free online college advisory service.College graduate in cap and gown

What are the two types of 529 Plans?

Traditional savings plans. Most 529 plans are state-sponsored savings accounts managed by an investment company. You can choose your investments from a variety of mutual funds, and you can enroll in a plan from any state.

Prepaid tuition plans. These plans let families pay for college in the future using today's prices. They are usually offered by in-state public colleges and are guaranteed by the state. Some private colleges accept a prepaid tuition plan called the Private College 529 Plan.


What are the benefits of 529 Plans

Both types come with tax advantages. Contributions to a 529 are allowed to grow tax-free and, if the money is spent on eligible college expenses, withdrawals incur no tax or penalties. The tax benefit, however, must be shared with any other federal education tax breaks the student is eligible for.

Contribution limits are generous. Individuals can contribute up to $15,000 a year ($30,000 for joint filers) without incurring gift tax. Or you can make a one-time contribution up to $70,000 ($140,000 for joint filers) without incurring gift tax. Most plans have a lifetime cap on the total value of a 529 plan, including interest earned. The caps vary by state but can be as high as $300,000 or more.


What are the rules for using and investing 529 funds?

You can use 529 money only for "qualified education expenses." These include tuition, fees, room and board, books, supplies, and required equipment at any eligible institution of higher education. The money can't be used for expenses already covered by financial aid. As of 2018, families can use 529 plans to pay for elementary and secondary school expenses, including private school tuition and home schooling expenses, up to $10,000 per year.

Using 529 money to pay for ineligible expenses incurs a ten percent penalty. Plus, that money will be taxable. If you don't use all the money, you can transfer the account to another beneficiary in the family, including a parent.

Investment changes are allowed. Plan owners are allowed to change their investment strategies twice a year or at other times under certain circumstances, such as a change in beneficiary or a rollover from another state plan.

Transfers from other college savings are allowed. You can transfer money from certain tax-free college savings accounts into a 529 account without penalty.


What are the effects of 529 Plans on financial aid?

529 accounts owned by parents or a dependent student have little impact on your aid eligibility. When the government calculates your financial need, it will count only a small percentage of assets in 529 plans and will not consider withdrawals made during college as income.

529 accounts owned by others can have a significant impact. Anyone can open a 529 account on your behalf, such as grandparents or family friends. Money withdrawn from these accounts will be considered student income, which can reduce your aid eligibility by as much as 50 percent of the amount withdrawn. Such funds are best used after your junior year of college, when they won't affect your eligibility for aid.

529 accounts may impact your financial aid at private colleges. Many private colleges use an aid calculation that asks about all 529 accounts that benefit you, regardless of ownership.


Watch Out for 529 Fees!

Some 529 savings plans have high administration fees that can eat into your earnings. Many plans waive one or more of these fees, or combine them into one "management fee."




To see other college savings options, visit Planning Ahead to Pay for College.

To research 529 plans, visit, which lists all the 529 plans by state.