What is a 529 plan?

529 savings plans are one of the most popular education savings account types in the U.S. They help you save for education and offer tax benefits, high contribution limits, and flexibility. Plans are usually sponsored by states (every state has one except Wyoming) and managed by mutual fund companies and broker-dealers.

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). 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?

The way a 529 plan works is simple: A parent, grandparent, or other individual opens the account and makes contributions on behalf of a designated beneficiary, who could be a child, grandchild, or even the account holder themselves. The contributions can be invested in a variety of assets, such as stocks, bonds, or mutual funds, and any earnings grow tax-free.

One of the main advantages of a 529 plan is that the earnings from the investments grow tax-free, as long as the funds are used for qualified education expenses. This means that families can save more money for their loved one's education without having to worry about paying taxes on the growth of their investments. Additionally, some states offer tax deductions or credits for contributions made to a 529 plan, making it an even more appealing option.

Wondering which 529 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 apprenticeship programs. You can also select the investment strategy you're most comfortable with: Choose your own asset mix or select a target enrollment portfolio that becomes more conservative as your beneficiary gets closer to their expected enrollment year.

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 under the 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. There are also certain account types to avoid.

Benefits of a 529 plan

529 plans offer flexibility, control, and tax advantages for those looking to save for a loved one's education. These plans allow you to choose how much and how often you contribute, as well as how to invest the money.

Tax advantages

Maximize your savings and minimize taxes with a 529 plan. Your contributions may be state tax deductible and you could benefit from tax-deferred growth and tax-free withdrawals for qualified education expenses, making it a smart choice for your future.

Tax advantages of a 529 plan:

• Investments grow tax-free.
• You can withdraw funds tax-free (including earnings) for education expenses, such as tuition, room and board, and assigned textbooks.

Flexibility

As the account owner, you can save for anyone (even yourself!). You maintain control of the account and can transfer it to another beneficiary at any time.1 If your beneficiary doesn't end up needing the money for education expenses, you can still access your 529 savings. Thanks to SECURE Act 2.0, you can transfer up to $35,000 to the beneficiary's Roth IRA.2 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.³

High contribution limits

Unlike IRAs, 529 plans aren't subject to annual contribution limits. The aggregate amount you can contribute depends on your plan, but lifetime contribution limits are high (between $235,000 and $575,000 per beneficiary for 2024).^*

^*Source: How much can you contribute to a 529 plan

Low impact on financial aid

If you (as the parent) are the account owner and your child is a dependent and the beneficiary, 529 savings will have a much lower impact on financial aid for higher education than other account types opened in your child's name.

Did you know? Previously, distributions from a 529 plan could reduce the recipient's financial aid by up to 50% of the distribution amount. For example, a $25,000 distribution from a grandparent-owned 529 could mean a $12,500 reduction in a student's financial aid package.

Starting in the 2024–2025 academic year, the simplified FAFSA no longer requires cash support or distributions from a grandparent-owned 529 to be reported. With this update, you can help your loved ones pay for their education without affecting their eligibility for financial aid.

How to open a 529 plan

Want to get started? Find out what you need to open a 529 and start saving for the future.

1. Determine your eligibility

529 accounts are usually opened by a parent or 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.

2. Choose the right 529 plan

Review tax benefits, fees and costs, investment options, and more to see which 529 plan is best for you.

3. Select a 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, award-winning investments, and exceptional customer service.

4. Open your 529 plan account

Ready to start saving? Open a 529 plan account today. All you need to do is provide some personal and financial information to complete your application.

5. Fund your 529 plan

Once your 529 is open, you can start contributing via direct deposit, bank transfer, or rollovers from other accounts. And unlike IRAs, there aren't annual contribution limits for 529 plans.

6. 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:

• Regularly review your account statements.
• Track your investment performance.
• Adjust your investment choices as needed.
• Adjust your contributions as needed. 

It's also 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 ensure you're maximizing your education savings.

Get started today