529 College Savings Plans

529 plans, also known as Qualified Tuition Plans, are a great way to save for college. We've written this guide to answer some common questions associated with the plan, and give you information so you can make a college education an affordable choice for you or your child.

What is a 529 Plan?

529 plans are tax-advantaged savings programs that help families save for future college costs. They are typically operated by states or educational institutions, depending on your plan type.

Types of 529 Plans

There are two types of 529 plans: prepaid tuition plans and college savings plans. Every state offers at least one of these types of plans, or is developing one. Some states offer both, and many of these plans are open to non-residents.

Prepaid Tuition Plans

Prepaid tuition plans allow participants to lock in today's tuition rates at any of a state's eligible public colleges or universities so that they don't have to worry about future tuition increases.


  • Almost anyone can contribute (such as grandparents, out-of-state family, or friends)
  • Locks lower tuition rates for public and private schools
  • Not subject to federal (and in some cases, state) taxes when used on qualified expenses
  • Guaranteed by the state


  • Restrict a student's school options
  • Counts as a parental asset for financial aid (unlike savings plans). Parental assets are assessed at about 5.6% when determining a family's Epected Family Contribution.
  • Covers only tuition and mandatory fees. Some plans do allow for a room and board option, but this will cost extra.

College Savings Plans

With college savings plans, students of all ages can save for all college costs, including tuition, fees, room, board, textbooks, and computers. Similar to retirement accounts, savings plans typically consist of mutual funds, which determine your plan's earnings.


  • Not limited to in-state schools or residents
  • Covers most qualified education expenses at eligible colleges, universities, and other post-secondary institutions.
  • Contribution limits can vary and maximum and minimum contributions limits are set by most plans. To increase the amount of contributions you can make, you can open a second college savings plan in another state.
  • A number of investment options are available for most plans. You can invest in various portfolios of mutual funds that are both age-based and non-age-based.


  • Risk- Investing in college savings plans does come with some risk. Unlike prepaid tuition plans, they don't lock in tuition prices. Nor does the state back or guarantee the investments. With most college savings plan investment options, there's a risk of losing money, or it may not grow enough to pay for college.
  • Fees, Charges, and Expenses- All 529 plans have various fees and expenses. Like mutual funds, some college savings plans have different classes. Often referred to as Class A, B, or C shares, units or fee structures, each class has different fees and expenses. You can look at the offering document to see if a particular college savings plan offers more than one class.

Common Features of Prepaid Tuition and College Savings Plans

Federal Tax Advantages

529 plans are one of the few available tax-advantaged college savings options. Earnings and withdrawals are both tax-free for qualified education expenses.

According to the Internal Revenue Service, the yearly contribution limit is equal to the amount necessary to provide for the education costs of the beneficiary. On a 529 plan, any contributions and additional gifts that exceed $13,000 in a year may have gift-tax consequences.

State Tax Advantages

State tax treatment of 529 plans varies from state to state. In over 20 states, contributions are tax deductible if you're a resident of the state sponsoring the 529 plan. For example, in Missouri, up to $8,000 in contributions to the state's 529 plan can be deducted from Missouri state taxable income per year. Many states don't tax earnings or qualified withdrawals from 529 plans. To get this tax exemption, you may have to live in that state and choose its 529 plan.


529 plans allow the account owner to maintain control over the assets in a 529 plan for the life of the account. You can change beneficiaries to another "family member" of the original beneficiary. Thus, if your child gets a scholarship or decides not to go to college, you can name another beneficiary, even yourself. Some 529 plans, especially prepaid tuition plans, may limit or restrict your ability to change beneficiaries.


The assets of one 529 plan can be transferred tax-free to the beneficiary of another 529 plan, as long as the new beneficiary is a family member. Family members include, but are not limited to, the beneficiary's spouse, son, daughter, grandchild, first cousins, niece, and nephew.

The assets of one 529 plan also can be transferred tax-free to another 529 plan for the same beneficiary. However, only one transfer of this type is allowed within any 12-month period. There also may be state tax implications when you transfer from one 529 plan to another. You may want to consult with your tax advisor before you make a transfer.

Withdrawals for Non-College Related Expenses

If your child decides not to go to college or you over-fund a 529 plan, you may pay a penalty in addition to any taxes you owe on any earnings. If you withdraw money from a 529 plan that's not used for qualified education expenses, you may be required to pay income tax and an additional 10% penalty on earnings.

There are a number of exceptions to this penalty. The penalty may be waived if your child gets a scholarship or is disabled. You also can avoid taxes and penalties by transferring the 529 plan to another beneficiary that will use the funds for qualified education expenses. Furthermore, you can use our College Savings Calculator to estimate the amount you need to save so that you don't over-fund a 529 plan.

For More Information

Internal Revenue Service (IRS). The IRS has information on college savings options discussed here. Publication 970, Tax Benefits for Higher Education is a good place to start. It discusses 529 plans, ESAs, savings bonds, and tax credits and deductions for higher education expenses. You can find other information on their website, www.irs.gov. You also can call the IRS toll-free at 800-829-3676 to order publications.

College Savings Network. The National Association of State Treasurers' College Savings Plans Network website, www.collegesavings.org, provides information on 529 plans. Their site provides links to state 529 plan websites, information on state tax treatment, and other useful information. Bureau of Public Debt. The Bureau of Public Debt's Saving Bonds website provides everything from educational information to calculators to a direct purchase program for savings bonds.

529 Plans Sponsors. Most 529 plans allow you to directly invest through them. They provide you with offering circulars, applications, as well as a wealth of information on saving for college. Many brokers, financial advisers, and mutual funds firms work with one or more 529 plan sponsors and have information and materials on the plans. Most of these firms provide information on setting up ESAs and Custodial Accounts. Many firms also have websites that offer information on college savings options.