College costs more today than at any point in American history. The average annual cost of a four-year public university — tuition, fees, room and board — now exceeds $28,000. For a private nonprofit school, the figure is over $60,000 per year. A four-year degree can easily cost $120,000 to $240,000 by the time your kindergartner graduates high school. There is no way to think clearly about that number without a plan — and for most families, that plan should involve a 529 account.
What Is a 529 Plan?
A 529 plan — named after Section 529 of the IRS tax code — is a tax-advantaged savings account designed specifically for education expenses. The core benefit is simple: money you invest in a 529 grows completely tax-free, and withdrawals used for qualified education expenses are also tax-free. No capital gains tax. No income tax on the earnings. That's a meaningful advantage over a regular taxable brokerage account, where you'd owe taxes on dividends, interest, and any gains when you sell.
Every state in the U.S. offers at least one 529 plan, and you're not required to use your own state's plan. You can open a 529 in any state and use it to pay for school in any state — or internationally, at many eligible institutions. The reason you'd use your home state's plan is that many states offer an additional state income tax deduction for contributions to their own plan, which is free money worth checking into.
Two Types of 529 Plans
There are two distinct types of 529 plans, and most people are only familiar with one of them.
- College Savings Plans — the most common type; you invest contributions in mutual funds or ETFs, and the account grows based on investment performance; withdrawals for qualified expenses are tax-free
- Prepaid Tuition Plans — less common; you lock in today's tuition rates at participating in-state public universities by paying now; essentially a hedge against future tuition inflation; less flexible, as the credits only apply to specific schools
For most families, a college savings plan is the better choice because it's more flexible. You're not locked into specific schools, and if your child earns a scholarship or decides not to attend college, you have more options for what to do with the money.
What Counts as a Qualified Expense?
The IRS defines qualified education expenses broadly enough to cover most of the real costs of attending school. At the college level, qualified expenses include tuition and mandatory fees, room and board (up to the school's cost of attendance allowance, whether you live in the dorms or off campus), required textbooks and supplies, computers and internet access if used primarily for school, and special needs services.
A SECURE 2.0 Act expansion also allows 529 funds to be used for K-12 tuition — up to $10,000 per year — as well as apprenticeship programs and student loan repayment (up to $10,000 lifetime per beneficiary). As of 2024, unused 529 funds can also be rolled over into a Roth IRA for the beneficiary under specific conditions, which dramatically reduces the risk of saving 'too much' in the account.
Who Can Contribute and How Much?
Anyone can contribute to a 529 plan — parents, grandparents, aunts, uncles, family friends. There is no annual contribution limit set by the IRS, though contributions are treated as gifts for tax purposes. The annual gift tax exclusion for 2025 is $18,000 per donor per recipient, meaning you can contribute up to $18,000 per year to a child's 529 without triggering gift tax reporting. There's also a 529-specific provision called superfunding or 5-year gift tax averaging, which lets you contribute up to $90,000 at once (5 years of the annual exclusion) without gift tax, as long as you make no additional gifts to that child over the next five years.
Total account balances are limited by state — most states cap them between $300,000 and $550,000 per beneficiary. You can't add more once the account hits that ceiling, but existing funds continue to grow with no limit. Most families are nowhere near those caps, but it matters for grandparents doing estate planning who want to move large sums out of their taxable estate while benefiting future generations.
How to Choose a 529 Plan
Start by checking whether your state offers a deduction for contributions to its own plan. Many do — New York, for example, offers a deduction of up to $5,000 per year per taxpayer (or $10,000 for married couples filing jointly). If your state offers a generous deduction, that usually tips the scales toward staying in-state even if the investment options aren't perfect.
If your state offers no deduction or a very small one, shop around. The most frequently recommended 529 plans for their investment options and low fees are Utah's my529 plan, Nevada's Vanguard 529, and New York's 529 Direct Plan. All three offer low-cost index funds from Vanguard or similar providers with very low expense ratios. Fees matter: a 529 with a 1% annual expense ratio will cost you tens of thousands of dollars more over 18 years than one with a 0.1% expense ratio — for identical investments.
The single most important number in a 529 plan is the expense ratio of the investments inside it. A 0.1% expense ratio versus a 1% expense ratio on a $100,000 account costs you about $900 per year in wasted fees. Over 15 years, that's over $20,000 gone to fees instead of your child's education.
What If My Child Doesn't Go to College?
This is the question that makes many parents hesitate to open a 529, and the answer is more reassuring than most people expect. First, you can change the beneficiary on a 529 account to any qualifying family member — a sibling, a cousin, even yourself — without tax consequences. If one child gets a full scholarship and another needs the money, you simply reassign the account.
Second, as mentioned earlier, SECURE 2.0 now allows rolling unused 529 funds into a Roth IRA for the beneficiary, subject to conditions: the 529 must have been open for at least 15 years, the rollover is subject to annual Roth contribution limits, and the lifetime rollover maximum is $35,000. This is a relatively new provision and the rules have nuances, so consult a tax advisor before relying on it. Third, if none of the above applies, you can withdraw the money for non-qualified purposes, but you'll owe income tax on the earnings plus a 10% penalty — painful but not catastrophic. The original contributions come back to you with no taxes or penalties.
When Should You Start?
The answer is the same as with any investment question involving compound growth: as early as possible. A 529 opened the day a child is born has 18 years of growth before college starts. Contributing $300 per month from birth, in a plan earning 7% annually, produces about $118,000 by the time the child turns 18. Starting the same contributions at age 10 produces about $41,000. That gap — $77,000 — is the value of eight years of compounding. Time is the most powerful force in any savings plan, and 529s are no exception.
Even if you can't start large, start something. A modest account opened early with small, consistent contributions outperforms a larger account opened late. If you're a grandparent or family member looking to give a gift that genuinely helps a child's future, contributing to an existing 529 or opening one for a new baby is one of the most financially impactful gifts you can give — far more so than a toy they'll forget in six months.
Use our SIP Calculator to see how regular monthly contributions grow over time →
