529 Education Savings Plan
A 529 plan is a tax-advantaged savings account designed for education expenses. Contributions grow tax-free and withdrawals for qualified education costs (tuition, room & board, books) are also tax-free. Most states offer a deduction or credit for contributions.
Saving $300/month from birth through age 17 at 7% annual return → ~$114,000 tax-free for college.
529 plans are sponsored by states but usable at any qualifying school nationwide (and many abroad). The two types are savings plans (invest in mutual funds; balance varies with market) and prepaid tuition plans (lock in today's tuition rates at in-state schools).
There is no federal deduction for 529 contributions, but over 30 states offer a state income tax deduction or credit, often worth $500–$2,000 per year. Some states require you to use their own plan; others allow any plan.
Starting 2024, unused 529 funds can be rolled over to a Roth IRA for the beneficiary (up to $35,000 lifetime, subject to annual Roth limits), providing an exit route if the beneficiary doesn't use the money for education.
Related terms
- Roth IRA
- A Roth IRA is a US individual retirement account funded with after-tax dollars. Investments grow tax-free, and qualified withdrawals in retirement are completely tax-free.
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
- Traditional IRA
- A traditional IRA (Individual Retirement Account) is a tax-deferred retirement account. Contributions may be tax-deductible (depending on income and whether you have a workplace plan), and withdrawals in retirement are taxed as ordinary income.
- Health Savings Account (HSA)
- An HSA is a US tax-advantaged account for individuals enrolled in a high-deductible health plan (HDHP). Contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free — making it the only triple-tax-advantaged account.