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7 Things to Know About 529 Plans

Aug 23, 2021 3 min read Daniel Kurt

Key takeaways

  • Besides federal income tax benefits, many states have tax breaks for parents who fund their 529 plans.
  • 529 account funds can be used at colleges across the country, so you don’t have to use your state’s plan.
  • You can use up to $10,000 a year to cover private K-12 expenses.


Given the ever-rising cost of a college degree, many parents make their first move toward funding higher education before their child has even taken their first step. Naturally, figuring out where to invest for college becomes a critical decision.

Since their introduction in the 1990s  PDF Opens in new window, 529 plans have emerged as the go-to savings option for many American families. Here are seven facts to help you decide whether a 529—and which plan—may be right for you.



  1. 1. Many states offer their own tax benefits

    One of 529s’ biggest draws is the ability to grow assets tax free—and make federal tax-free withdrawals to cover “qualified” education expenses (things like tuition, room, board and required books and supplies). In much of the country, parents can get state tax breaks on their contributions as well.

    Indeed, more than 30 states offer residents an income tax deduction or credit for money they put into the plans. Typically, these breaks apply only when you invest in your state’s 529, but a handful of states offer tax benefits regardless of which plan you use.


  2. 2. They’re not just for college

    Congress originally created 529 plans as a way to head off the growing cost of higher education. But as of 2018, you can withdraw up to $10,000 a year Opens in new window, tax free, toward the costs of putting your child through private school from kindergarten to 12th grade.


  3. 3. 529 plans count as a ‘parental asset’ on the FAFSA

    Most colleges use the Free Application for Federal Student Aid (FAFSA) Opens in new window to determine eligibility for grants, scholarships and loans. The good news is that money in a 529 account, whether owned by a parent or the child, is considered a “parental asset” when calculating the expected family contribution (EFC) that the FAFSA tells colleges you can afford. That means roughly $10,000 is excluded from aid consideration—the exact amount varies based on the parent’s age—with the remaining funds reducing the student’s aid package by up to 5.64% of the account value. That’s considerably less than “student assets” like custodial investment accounts (e.g., UGMA/UTMA) which can impact financial aid by up to 20% of their value.1

    Also note that the FAFSA only counts 529 assets owned by the student or the parent who claims them as a dependent; the more detailed CSS Profile Opens in new window required by some colleges—which dings students for 25% of their assets—includes all 529 funds for which the student is beneficiary, no matter who owns them.2


  4. 4. You don’t have to use the plan from your state

    Not all 529 plans are created equal. Each state runs its own program, with some offering more investment choices and lower management fees than others. (The investments themselves are managed by professionals, typically mutual fund companies.) So, you might want to shop around—especially if your state doesn’t offer a tax break on contributions or doesn’t base its breaks on which plan you choose.

    Money in a 529 can be used to pay for education expenses anywhere in the country, so it doesn’t matter if your child crosses state lines. However, things are more complicated with prepaid tuition plans Opens in new window, where benefits can change if your child pursues an education out of state.


  5. 5. You can switch the beneficiary

    What if you sock money away for several years, only for your child to decide that college isn’t for them? If you choose to make a nonqualified withdrawal, you’ll have to pay income tax plus a 10% penalty on any accrued earnings. The good news is, 529 benefits are portable: You can use the money in your child’s account for your own higher education needs Opens in new window or transfer it to an eligible relative (including immediate, extended and stepfamily, in-laws and often their spouses) to avert taxes when you pull funds out.3


  6. 6. You can use them to pay college loans

    These college saving plans aren’t only for current students. Since the SECURE Act took effect in 2019, former students can withdraw funds from a 529 to help pay down federal and most private loans, up to a $10,000 lifetime limit. There’s a separate cap for the beneficiary’s siblings, so parents can tap as much as $10,000 for each child with a qualifying loan.4


  7. 7. Other family members can contribute

    You don’t have to be the child’s parent to help bulk up their 529 account. For 2021, aunts, uncles and grandparents can contribute up to $15,000 per child and still qualify for the federal gift tax exclusion. Alternatively, they can open their own 529 Opens in new window with the child as the beneficiary.

    More good news: In the past, students had to be extra careful when tapping grandparent-owned 529s. That’s because funds withdrawn two years prior counted as “student income” on the FAFSA. But the Department of Education recently announced a new, simplified version of the application for the 2023–2024 academic year. The upshot: Uncle Sam still looks at income from two years back, but distributions taken in 2021 or later from grandparent-owned 529s won’t adversely affect the student’s aid package.


What you can do next

The investment vehicle you select for your child’s education expenses can make a dramatic difference. The tax advantages of 529 accounts make them a popular choice, though you’ll want to carefully weigh your options—and maybe talk to a financial professional—before making a choice.


  1. 1 “Will a 529 or UTMA Affect My College Student’s Eligibility for Financial Aid?” Walsh & Associates, Mar. 21, 2019 (walshandassociates.com/blog/283-will-a-529-or-utma-affect-my-college-students-eligibility-for-financial-aid)
  2. 2 Mark Kantrowitz, “What are the Differences between the FAFSA and CSS Profile?” Saving for College, June 17, 2019 (savingforcollege.com/article/what-are-the-differences-between-the-fafsa-and-css-profile)
  3. 3 “To Whom Can I Transfer the Money in a 529 Plan?” EdmitMe, accessed Aug. 17,2021 (edmit.me/blog/to-whom-can-i-transfer-the-money-in-a-529-plan)
  4. 4 Ann Carrns, “New Law Expands Uses for 529 College Savings Accounts,” The New York Times, Jan. 10, 2020 (nytimes.com/2020/01/10/your-money/529-college-savings-accounts.html)


Daniel Kurt is a freelance writer with over 10 years of experience covering topics in personal finance, retirement planning, insurance and more. His work has appeared on Investopedia, AARP Bulletin, Fatherly and Exceptional magazine.


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