What Is the Definition of a 529 Plan?

A 529 plan is a savings account designed to help individuals set aside funds for future education costs. These plans, named after Section 529 of the Internal Revenue Code, are sponsored by states, state agencies, or educational institutions. The purpose of a 529 plan is to provide a tax-advantaged way to save, meaning the money can grow without being subject to annual taxes, and withdrawals for qualified educational purposes are tax-free. The plans support a wide range of educational pursuits, from college tuition to apprenticeship programs.

Key Roles and Contributions

Every 529 plan involves two figures: the account owner and the beneficiary. The account owner, such as a parent or grandparent, establishes and controls the account. This control includes managing investments, determining when withdrawals are made, and possessing the authority to change the beneficiary to another eligible family member. The beneficiary is the individual for whom the funds are intended to be used for educational expenses.

Contributions to a 529 plan can be made by anyone, including parents, relatives, or friends. While contributions are not federally tax-deductible, the funds grow on a tax-deferred basis. Contributions are considered completed gifts for tax purposes, and for 2025, an individual can contribute up to $19,000 per beneficiary without gift tax implications. A feature known as “superfunding” allows for a lump-sum contribution of up to $95,000, which is treated as if it were made over a five-year period for gift tax purposes.

Types of 529 Plans

There are two distinct types of 529 plans. The most common is the education savings plan, which functions like an investment account where contributions are placed into portfolios of mutual funds or ETFs. The value of an education savings plan fluctuates with market performance, offering potential for growth but also carrying investment risk. These plans can be used to pay for expenses at any accredited college, university, or vocational school nationwide.

The second type is the prepaid tuition plan. These plans allow an account owner to purchase future tuition credits at today’s prices. Prepaid tuition plans are sponsored by state governments and are designed to cover tuition and mandatory fees at in-state public colleges and universities. While they offer protection against rising tuition costs, they are less flexible than education savings plans and may not cover expenses like room and board.

Qualified Education Expenses

For higher education, qualified expenses include tuition and fees, books, supplies, and equipment required for enrollment at an eligible postsecondary school. Room and board costs also qualify, provided the beneficiary is enrolled at least half-time.

Up to $10,000 per year per beneficiary can be used for tuition at public, private, or religious elementary or secondary schools. The plans also support vocational training by covering expenses for fees, books, supplies, and equipment required for participation in a registered apprenticeship program.

Assets from a 529 plan can also be used to repay student loans. A lifetime limit of $10,000 per beneficiary can be withdrawn tax-free to pay down principal or interest on a qualified education loan.

Tax Treatment of Distributions

Earnings in a 529 account accumulate on a tax-deferred basis at the federal level. When distributions are taken for qualified education expenses, the entire withdrawal, including contributions and earnings, is free from federal income tax. Many states also provide their own tax benefits, such as a state income tax deduction or credit for contributions.

A distribution not used for a qualified education expense is a non-qualified distribution. The portion of the withdrawal that represents earnings is subject to ordinary income tax and a 10% federal tax penalty. The part of the withdrawal consisting of original contributions is returned tax- and penalty-free, as it was made with after-tax money.

Rollovers to a Roth IRA

Unused funds in a 529 plan can be rolled over into a Roth Individual Retirement Account (IRA) for the beneficiary, allowing leftover savings to be repurposed for retirement without incurring taxes or penalties. To be eligible for this rollover, the 529 account must have been maintained for at least 15 years.

The amount moved in a given year is subject to the annual IRA contribution limit and cannot exceed the beneficiary’s earned income for that year. There is a lifetime maximum of $35,000 that can be moved from a 529 plan to a Roth IRA. Additionally, any contributions and their associated earnings must have been in the 529 account for more than five years to be eligible for a rollover.