What is a 529 College Savings Plan?

Learn more about making a concrete plan to save and pay for education using the 529 Plan.

What is a 529 Plan?

With college tuition getting more and more expensive every year, it may be smart to invest in your child’s or grandchild’s future by setting aside some money into a 529 college savings plan. The 529 Savings and Prepaid Tuition plans, also known as Section 529 Plans, offer advantages when used to fund education from K-12 education to graduate school.

The 529 Savings plan offers some tax benefits, meaning the money that grows in your 529 account won’t be taxed until withdrawal, withdrawals used on education (up to certain amounts) are not taxed, and some states even offer tax deductions for contributions to the account.

The Prepaid Tuition plan allows people to pay in advance for all tuition costs at current rates, saving money in the long-run (see the last card in this stack, Types of 529s: Prepaid Tuition Plan, for more detail).

These plans also differ state by state. The plan is administered separately by the 50 states in the U.S., but you can sign up for any state’s 529 plan. Choosing a 529 plan outside your state may not offer the same tax benefits as your home-state, but may suit your needs better.

How the 529 Plan Works

While 529 Plans are generally set up by parents or grandparents to pay for a child’s education, any U.S. citizen or resident can have a 529 Plan.

You can even open up a 529 account for yourself! 

529 plans are tax-deferred, which means that as the money in the 529 account grows over time, it won’t be taxed until withdrawal. Even better, if the withdrawals are used to pay for education expenses, they won’t be taxed either, up to a certain amount.

You can contribute as much or as little as you want to a 529 plan each year, however most states do have an upper limit on total contribution. This is usually around $475,000 in total balance per beneficiary.