Learn how a 529 plan works, key tax benefits, and qualified uses. Compare options and see how to open one with Vanguard.
What is a 529 plan?
- A 529 plan is a tax-advantaged account designed to help you save for education expenses.
- Investment growth is tax-deferred, and qualified withdrawals are federally tax-free.1
- Funds can be used for a wide range of education costs, from college and trade schools to many K–12 expenses.2
- If money isn’t used for education, you may have other options, including changing beneficiaries or, in some cases, rolling eligible funds into a Roth IRA.3
One of the most popular ways to save for education in the U.S. is through a 529 savings plan due to the tax benefits, high contribution limits, and flexibility these plans offer. Plans are usually sponsored by states, and every state, except Wyoming, has one.
You can save in almost any state’s plan, regardless of where you live, and you can use your savings to pay for qualified education expenses in any state (and, in some instances, even abroad). Check your own state’s tax benefits because many states offer their residents state tax deductions for contributions. With rising tuition costs, a 529 plan can provide a tax-advantaged way to financially prepare for a loved one’s future education.
How does a 529 plan work?
A 529 plan allows you to invest money for future education expenses on behalf of a beneficiary. The plans allow you to make contributions using after-tax dollars, and earnings grow tax-deferred. When the money is withdrawn and used for qualified education expenses, those withdrawals are generally free from federal income tax, too.1
Most 529 plans offer a range of investment options, including portfolios that gradually become more conservative as the beneficiary approaches their target enrollment year. Many also offer static portfolios that maintain a consistent investment strategy over time.
529 plans can be used for a variety of education expenses, including tuition, room and board, books, supplies, and certain trade schools and a variety of educational expenses costs. On the other hand, if you use 529 funds for expenses that don’t qualify, the earnings portion of the withdrawal could be subject to federal tax and a 10% federal penalty.
What are the types of 529 college savings plans?
There are two types of 529 savings plans: education savings plans and prepaid tuition plans. Both can help you save for education, but they work differently. Education savings plans offer more flexibility and are the most widely available type of 529 saving plan. Prepaid tuition plans, which are offered by a limited number of states, allow families to lock in future tuition costs at participating schools.
| Education savings plan | Prepaid tuition plan | |
|---|---|---|
| Best for | Families who want flexibility in which school a student attends. | Families planning for a specific college path or specific school(s), often at an in-state public institution. |
| Flexibility | Can typically be used at eligible schools nationwide. | Mainly limited to participating schools and programs. |
| What it covers | Tuition, fees, books, supplies, room and board, and other qualified expenses. | Primarily tuition and certain required fees. |
| Investment approach | Value grows or declines based on market performance. | Locks in today’s tuition costs rather than offering potential market gains (or losses). |
| Availability | No residency requirement. | Often limited to state residents. |
Explore the advantages of the Vanguard 529 College Savings Plan
The Vanguard 529 College Savings Plan is an education savings plan. Because prepaid tuition plans are less common, this article generally used the term 529 plan to refer to education savings plans.
What are the benefits of a 529 plan?
529 plans offer flexibility and tax advantages for those looking to save for a loved one’s education. Anyone can open a 529 savings plan, including parents, grandparents, aunts, uncles, and friends. These plans allow you to choose how much and how often you contribute, as well as how to invest the money.
Explore state-specific benefits.
You can open a 529 plan for anyone, even yourself. They do not need to be a relative. You maintain control of the account and can transfer it to eligible family members at any time. If your beneficiary doesn’t end up needing the money for education expenses, you can redirect your 529 savings. Thanks to the SECURE Act 2.0, you can roll over up to $35,000 to the beneficiary’s Roth IRA.3 Keep in mind that if you use the money for nonqualified expenses, you may be subject to a penalty and income tax on any earnings.
What can you use a 529 plan for?
Money in a 529 plan can be used for a variety of education-related expenses, as long as they meet qualified expense rules. This typically includes tuition, fees, and room and board at eligible institutions. The money can also be used for K–12 tuition, certain trade school programs, post-secondary credentialing program expenses, and even student loan repayment.2
What expenses qualify for a 529 plan?
Qualified expenses are education costs that you are allowed to pay from a 529 plan without triggering federal income tax on earnings. The IRS determines which expenses qualify. Common qualified expenses include:
Covered cost |
Qualified expenses |
|---|---|
Higher education |
Tuition, fees, books, supplies, and required equipment. |
Room and board |
On-campus housing or eligible off-campus living costs. |
K–12 education5 |
Private- or public-school tuition and other expenses (up to $20,000 per year). |
Trade schools |
Costs associated with programs registered and certified by the U.S. Department of Labor. |
Postsecondary credentialing programs |
Certain expenses in connection with obtaining and maintaining a recognized postsecondary credential |
For a full list of eligible 529 expenses, see Vanguard’s guide.
What expenses don’t qualify for a 529 plan (and how do penalties work)?
Some education-related expenses are not considered qualified under 529 rules. Using funds for these purposes could trigger taxes and penalties on the earnings portion of the withdrawal.
Common nonqualified expenses include:
- Transportation (airfare, ride shares, parking, public transit).
- Clothing and personal items.
- Health insurance and medical expenses.
- Sports, club, or extracurricular fees not required by the institution.
- Electronics not required for coursework.
- Travel, vehicles, and general living expenses outside qualified room and board.
If you use funds for nonqualified expenses, earnings may be subject to federal income tax and a 10% federal penalty may apply to earnings. In some states, a nonqualified withdrawal may require you to repay state tax deductions or credits you previously received for contributing to the plan.
There are some exceptions. For example, if a beneficiary receives a scholarship, you may be able to withdraw an equivalent amount without paying the 10% federal penalty.
What happens if a 529 plan is not used?
If the beneficiary does not use all the funds in a 529 plan, the account owner has several options. Funds can remain invested for future education expenses, or the beneficiary can be changed to another eligible family member.
Under the SECURE Act 2.0, unused 529 funds—up to $35,000 over a lifetime—can be rolled over tax- and penalty-free into a Roth IRA for the beneficiary. The rollover is subject to annual Roth IRA contribution limits and account-age rules.3
Other ways to save for education
While 529 plans are designed specifically for education savings, there are other account types you can use to plan for future education expenses. For example, custodial accounts like Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) and nonretirement brokerage accounts can also be used to save for education costs. Before you make a decision, it’s important to research and compare different education savings plans to find the best option for your individual needs.
Wondering which plan to invest in?
You can save in almost any state’s plan and use your savings to pay for qualified expenses at any eligible school in the U.S. or abroad, as well as for trade school programs. Bear in mind that if you invest in a plan outside your home state, you may lose a state tax benefit unless your state offers tax parity.
Education savings plans generally offer a range of investment options, from target enrollment date portfolios that automatically become more conservative over time to portfolios that maintain a consistent asset allocation. Many 529 savings plans also offer a suite of individual portfolios you can mix and match to build your own custom allocation.
Get started saving for education with a 529 plan.
Determine who is eligible for a 529 plan
529 accounts are usually opened by a parent or a grandparent on behalf of a child, but anyone with a Social Security number or tax ID number can open a 529 plan to fund current or future educational expenses. Anyone can be the beneficiary of a 529 plan as long as they’re a U.S. citizen or resident alien with a Social Security number or tax ID number. There are no age restrictions on who can benefit from the account.
Once you’ve determined eligibility, you can follow these steps to begin saving in a 529 plan:
1. Choose the right 529 plan
Review tax benefits, fees and costs, investment options, and more to understand which 529 plan is best for you.
2. Select a 529 plan provider
After choosing a 529 plan, you’ll want to use the same criteria above to evaluate different providers and select one for your plan. With The Vanguard 529 Plan, you can expect low costs and exceptional customer service.
3. Open your 529 plan account
Ready to start saving? You can open a 529 plan account with Vanguard today. All you need to do is provide some personal and financial information to complete your application.
4. Fund your 529 plan
Once your 529 plan is open, you can start contributing via direct deposit, bank transfer, or rollovers from other accounts. Many plans also allow you to set up recurring contributions so your savings grow consistently. And unlike IRAs, there aren’t annual contribution limits for 529 plans.
5. Manage and monitor your 529 plan
It’s important to regularly manage and monitor your 529 plan to ensure it stays aligned with your savings goals. Here are some steps you can take to effectively manage and monitor a 529 plan:
- Establish a clear savings goal based on your expected education costs.
- Review your progress regularly and adjust your contributions as needed.
- Consider shifting your investment choices to be more conservative as your beneficiary’s target enrollment date nears.
- Stay on top of any changes to your 529 savings plan or plan performance.
It’s important to stay informed about changes in tax laws or other regulations that may affect your 529 plan. If you’re looking for professional support in managing and monitoring your 529 plan, consulting a financial advisor can help you save time and help ensure you’re maximizing your education savings.
529 plan frequently asked questions
Yes. Anyone can be a beneficiary of a 529 plan, even yourself.
Anyone can contribute, including parents, grandparents, relatives, and friends. Contributions are subject to state plan rules and gift tax considerations.
You have several options. You may be able to change the beneficiary to another eligible family member, leave the funds invested for future education expenses, or roll over eligible funds to a Roth IRA for the beneficiary, subject to IRS rules and limits.3 You can also withdraw the funds for nonqualified expenses, though earnings may be subject to federal income tax and a 10% penalty.
Yes. You can generally change the beneficiary of a 529 plan at any time without tax consequences, provided the new beneficiary is an eligible family member under IRS rules.
You will not receive a federal tax deduction for your contribution to a 529 plan. However, some states offer deductions or credits for contributions to 529 savings plans.
Qualified expenses generally include tuition, fees, books, supplies, and certain room and board costs at eligible institutions.