529 Plan
Quick Definition
A tax-advantaged savings plan designed to help families save for future education expenses.
Key Takeaways
- Tax-free growth and tax-free withdrawals for qualified education expenses
- Covers tuition, fees, books, room and board, and K-12 tuition up to $10,000/year
- Many states offer tax deductions or credits for contributions
- Unused funds can be rolled to a Roth IRA since 2024 (with conditions)
- Two types: education savings plans and prepaid tuition plans
What Is 529 Plan?
A 529 plan is a tax-advantaged investment account established under Section 529 of the Internal Revenue Code, designed specifically for saving for education expenses. There are two types: education savings plans (which allow investment in mutual funds or similar instruments) and prepaid tuition plans (which lock in current tuition rates at eligible institutions). Contributions are made with after-tax dollars but grow tax-free, and withdrawals are tax-free when used for qualified education expenses including tuition, fees, books, room and board, and up to $10,000 per year for K-12 tuition. Many states offer state income tax deductions or credits for contributions. Since 2024, unused 529 funds can be rolled over into a Roth IRA for the beneficiary (subject to conditions including a 15-year account age and annual Roth IRA contribution limits).
529 Plan Example
- 1Parents opened a 529 plan when their child was born and contributed $300 per month, accumulating over $100,000 by the time the child started college.
- 2Starting in 2024, a family rolled $35,000 of unused 529 funds into a Roth IRA for their child who received a full scholarship, subject to annual contribution limits.
Related Terms
Custodial Account
A financial account managed by an adult on behalf of a minor, with assets transferring to the child at the age of majority.
Tax-Deferred
An investment or account where taxes on earnings are postponed until funds are withdrawn, typically in retirement.
Beneficiary
A person or entity designated to receive assets, benefits, or proceeds from a financial account, insurance policy, trust, or estate.
Traditional IRA
A tax-advantaged individual retirement account where contributions may be tax-deductible and earnings grow tax-deferred.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
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