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529 plans are one of the most popular ways for families to save for a child’s college education. Although plans differ from state to state, all offer federal tax-free growth on earnings when used for qualified education expenses — giving your college savings a meaningful boost.

What is a 529 plan?

A 529 plan is a state-sponsored savings program that allows families to save for education with federal tax-free investment growth. While each state’s plan has unique features, all share several core benefits.

What are the two types of 529 plans?

  • College Savings Plans — Investment accounts that can be used for qualified expenses at most colleges and universities nationwide.
  • Prepaid Tuition Plans — Allow families to lock in future tuition at today’s rates at participating in-state public colleges.

Nearly every state offers at least one type of 529 plan, and many offer both.

Plan details for both types of 529 plans

  • Earnings and withdrawals are federal tax-free when used for qualified education expenses.
  • State tax deductions or credits vary by state.
  • Non-qualified withdrawals may incur federal income tax and a 10% penalty on earnings; state tax treatment varies.
  • Most states partner with professional investment firms to manage their 529 plans.

Note: Each state’s 529 plan has its own rules and restrictions. Always review the most current plan details. For information about any state’s plan, click here.

A qualified, tax-free 529 distribution may include the cost of computers, related technology, and internet access if used by the beneficiary during years of enrollment at an eligible educational institution.

Which type of 529 plan is right for you?

It depends on your goals. College savings plans offer more flexibility but carry investment risk. Prepaid tuition plans reduce risk by locking in tuition costs but limit where funds can be used.

College Savings Plan Prepaid Tuition Plan
Can be used for qualified expenses at most public or private colleges nationwide. Primarily for in-state public colleges, though some states have reciprocal agreements.
No residency requirement to participate. Typically requires state residency.
Treated as a parent asset for financial aid, meaning only up to 5.6% of the account value is counted in the Student Aid Index (SAI). May reduce financial aid eligibility more significantly. Payments to the college may be treated like scholarships and reduce need dollar-for-dollar.
Investments are not guaranteed and may lose value. There is no assurance the account will cover expected college costs. Locks in tuition at today’s rates, guaranteeing coverage for the portion prepaid.
Offers a range of investment options, including higher-risk choices with potential for higher returns. Lower risk and lower return — but predictable outcomes when tuition is due.
Funds can be used for a broad range of education-related expenses. Some plans restrict use to tuition and fees only; others allow additional expenses if tuition units exceed costs or scholarships reduce tuition.
Very high contribution limits — often $250,000 or more per beneficiary. Contribution limits vary and are generally lower.