Updated May 1, 2023

The Basics of 529 Savings Plans

Saving for college is a monumental task. With the average college cost of attendance continuing to rise and outpace economic inflation, saving more on your own can help cover more of those future costs. Just as important, it can reduce your need to rely on debt.

However, the ability to save tens of thousands of dollars in less than a twenty-year period (if you save from birth until approximately age 18) is a real hurdle, and low-interest-bearing savings accounts are not going to generate enough serious growth. That’s where 529 plans come into the picture.

What is a 529 Plan?

A 529 Plan is a tax-advantaged saving and investment vehicle for future qualified education expenses. The plans offer some major benefits that make them easy to use, and you can accumulate significant savings. The most notable benefits include investment growth opportunities, tax-deferred growth, and tax-exempt withdrawals.

Although named after the 529 section of the IRS Tax Code, each state administers its own plan.

There are currently two types of 529 Plans: Prepaid Tuition Plans and College Savings Plans.

Prepaid Tuition Plans

With a Prepaid Tuition Plan, you prepay all or a portion of future tuition. You are paying for college tuition at today’s rates, even though college may be several years away. In effect, this can help you avoid higher future tuition costs. The plans cover tuition at schools specified in the plan, which generally will be in-state public institutions. There is also the Private College 529 Plan.

With these plans, you are purchasing a contract that buys years or credits to cover future tuition costs. There are no investments for you to manage here. The plan’s performance or guarantees for the contract you purchase may or may not be provided by the state offering the plan. You’ll need to read the fine print for details.

Your Prepaid Tuition Plan savings grow on a tax-deferred basis, and withdrawn funds are exempt from income taxation if used for qualifying educational expenses. Additionally, your state may offer a tax credit or tax deduction if you contribute to your state’s plan.

Qualifying educational expenses for Prepaid Tuition Plans are tuition and mandatory fees.

There are currently nine states that make this type of plan available to new participants. Participants must be state residents to use their chosen prepaid plan, except for the Massachusetts U. Plan and the Private College 529 Plan. These plans may also be limited to specific enrollment periods each year.

Prepaid Tuition Plans are direct-sold, meaning participants open and manage accounts on their own without the help of a Financial Advisor.

College Savings Plans

The more well-known and widely available 529 plan is College Savings Plans, which provide the opportunity for you to invest in the stock market through your account. Investment selection includes mutual fund portfolios that have asset allocations that may be considered age-based portfolios, which shift more conservatively as a child gets closer to college-age, or static portfolios, which may have a specific investment target or consistent objective.

Investments can grow tax-deferred, meaning you do not have to currently pay taxes on any investment earnings (like dividends or capital gains).

When you withdraw money from the account (both the amount you contributed and any investment growth), the funds are tax-free as long as you use them for qualifying educational expenses. Additionally, your state may offer a tax credit or tax deduction if you contribute to your own state’s College Savings Plan.

Qualifying educational expenses for College Savings Plans include:

  • Full college tuition and mandatory fees
  • Books and supplies
  • Computer and internet access
  • Room and board
  • Special needs equipment

And, since 2018 and 2019, additional qualifying expenses include:

  • Elementary and high school tuition only – up to $10,000 per year
  • Technical schools (trade/vocational) and apprenticeships
  • Student loan repayment, up to $10,000 total

Expenses that are considered non-qualified (subject to income taxation) include:

  • College application and testing fees
  • Transportation and travel cost
  • Healthcare costs
  • Extracurricular fees

Forty-nine states plus the District of Columbia offer their own version of a College Savings Plan. However, families are not limited to just their own state plan and can use plans from other states if desired. Additionally, families can enroll in College Savings Plans at any time and are not limited to specified enrollment periods.

College Savings Plans can be either direct-sold or advisor-sold. With an advisor-sold plan, you work with someone licensed to sell investments, who can help you choose a plan and make investment choices within the plan.

Additional similarities between Prepaid Tuition Plans and College Savings Plans:

  • High contribution limits: set by the states, maximum contributions are in the range of $235,000 to more than $500,000.
  • Minimal financial aid impact: 529 Plan accounts that are owned by parents (student is the beneficiary) are treated as parental assets, with the maximum amount included in financial aid calculations equal to 5.65% of the account value. (So, financial aid may be reduced by approximately $570 for every $10,000 in your account.)

How to choose a 529 Plan

With dozens of 529 Plans available, it will take some homework to figure out which plan is best for your family.

A starting point to narrowing down your choices could be whether you have any preferences when it comes to the features noted above. For example, do you have a preference regarding:

  • Prepaid Tuition versus College Savings
  • Direct-sold versus Advisor-sold
  • Use of your own state’s plan for the tax benefits or other state incentives

Reviewing your own state’s plan(s) can help you familiarize yourself with a set of features that you can compare with other state plans. A few of these features that you really want to consider are:

  • Fees
  • Investment performance
  • Account minimums (initial and subsequent)

To learn about your own state’s plans and to compare plans, there are numerous online tools, like collegesavings.org.

To dig deeper, consider Morningstar’s annual 529 Plan reviews. They perform a robust assessment of plan stewardship, investment options, and fees.

Once you have your shortlist of plans you want to consider, visit the websites for those plans to review more in-depth details and learn how to open the accounts.

How much should you be saving for college?

Consider setting savings goals based on projected future costs and the time you have before you need the funds. To simplify your calculation, try online tools like Fidelity Investment’s College Savings Calculator.

What to do if you do not need your 529 plan savings after all?

If your student ends up not attending college or obtains scholarships or merit awards to cover their college costs, and you end up with money remaining in your 529 plan, you have a few options to manage the account going forward:

  • Leave the funds in the account
  • Change the account beneficiary to another person
  • Distribute the funds and pay applicable taxes on account earnings
  • Fund a Roth IRA for the account beneficiary up to $35,000 (Effective January 2024)
    • Account must be open for at least 15 years
    • Contributions for up to annual Roth limits only (no lump sum)


Your college funding journey may feel like a real uphill climb, especially as already astronomical college costs continue to rise.

One smart choice on the journey is to save more now, regardless of whether you have a newborn or a teenager. The more you save, the less your family will have to rely on burdensome debt like student or parent loans which will ultimately increase your out-of-pocket college costs in the long run.

529 Plans can make saving for college easier and boost your opportunities for growth through investing and tax efficiency. You just need to decide which plan is best for your situation.

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