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If I don’t know if I want to have kids, does it still make sense to start saving in a 529?

The primary purpose of a 529 plan is to save for educational expenses. You could use a 529 plan to save for your own education. 

The intention of the 10% tax penalty on non-qualified distributions is to discourage people from using a 529 plan as a general-purpose savings account.

If you are unsure whether you want to have children, you might want to wait until you’ve decided before you open a 529 plan account. Starting a 529 plan account when the child is just a twinkle in the parent’s eye is the best time to start, since it provides more time for the investments to grow.

Questions about Using a 529 Plan

What can 529 plan money be used for?

A 529 plan can be used to pay for college costs, K-12 tuition and to repay student loans

College costs include tuition and fees, books, supplies and equipment, computers, peripherals, software and internet access, and special needs expenses. A 529 plan can also be used to pay for room and board if the student is enrolled at least half time. The money in a 529 plan can be used to pay for any college degree or certificate, including undergraduate school and graduate school. 

You cannot use a 529 plan to pay for transportation and travel costs, health insurance, college application and testing fees, and extracurricular activities. 

The IRS considers up to $10,000 a year in K-12 tuition costs as a qualified educational expense for 529 plans. Some states do not consider K-12 tuition to be a qualified expense for state income-tax purposes.

A qualified distribution from a 529 plan can be used to repay up to $10,000 per borrower in federal and private student loans for the beneficiary and the beneficiary’s siblings. This is a lifetime limit per borrower. As with K-12 tuition, some states do not consider student loan repayment to be a qualified expense for state income-tax purposes.

Can you use a 529 plan to pay for college tuition outside the U.S. (international schools)? 

529 plans can be used to pay for any college or university that is eligible for U.S. federal student aid, including hundreds of foreign colleges and universities. They can also be used to pay for study abroad, where the foreign education is approved for credit at the student’s U.S. home college or university. Travel and transportation costs are not considered qualified higher education expenses for 529 plans, so students will have to find another way to pay for these costs.

When using a 529 to pay off student loans, the limit is $10,000 per student and $10,000 per each sibling. If each sibling has a 529 also, is that limit effectively multiplied? For example, if two kids and each has a 529, is the limit now $20,000 for each kid? 

No. The $10,000 limit is per borrower, not per 529 plan. The total of qualified distributions to repay a borrower’s student loans, from all 529 plans, is limited to $10,000. That is a lifetime limit.

Is there a deadline by which parents must start withdrawing 529 money?

There are no time limits on when you must start withdrawing 529 plan money. 

There are also no age limits on when you can contribute to a 529 plan.

You can keep the money in a 529 plan indefinitely.

This is unlike a Roth IRA or Coverdell education savings account, which have income limits and age limits. 

What else can you do with 529 money if your child’s college plans change?

There are several options if a child doesn’t go to college or if there is leftover money in a child’s 529 plan.

How does an 18-year-old student access his 529 held by his father? Is it the students or father’s property?

If the father is the account owner of the 529 plan, the father controls the account even after the child reaches the age of majority. The account owner can decide whether and when to take distributions from the 529 plan. The account owner can also change the beneficiary. Thus, the beneficiary has no control over the money in the 529 plan account.

If the student is the account owner, as occurs in a custodial 529 plan, then the student controls the account after reaching the age of majority.  The custodian must turn over control of the custodial 529 plan to the child when the child reaches the age of majority.

Ask the father or contact the 529 plan manager to learn about the type of 529 plan and if and how the child can gain control over the account. 

Questions about Changing 529 Plans

Does it ever make sense to change 529 providers? I started mine years ago. Since then, my state plan has never appeared in the top 10 lists. Should I make a change?

You can rollover money from one 529 plan to another. 

However, some states will treat an outbound rollover as a non-qualified distribution, even if the federal government considers it to be a qualified distribution. So, check with the 529 plan first to see how they treat outbound rollovers. 

In some cases, it might be better to leave the money in that state’s 529 plan, but shift new contributions to a new state’s 529 plan.

The decision to change 529 plans may depend on a change in the account owner’s state of residence, which can affect state income tax breaks. Other considerations may include the actual investment performance and net investment returns after fees, since each portfolio offered by a 529 plan may have different investment performance and costs.

Questions about the Tax Treatment of 529 Plans

What should families know about 529 plans and taxes?

Contributions to a 529 plan are made with after-tax dollars, similar to a Roth IRA. 

But, 529 plans are better than a Roth IRA because more than two-thirds of the states provide a state income-tax deduction or tax credit based on contributions to the state’s 529 plan. Seven states provide the state income tax break for contributions to any state’s 529 plan. These states are Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania.

People can contribute up to $15,000 per year ($30,000 as a couple) to a 529 plan without using up their lifetime gift tax exemption or incurring gift taxes. 529 plans provide five-year gift tax averaging which lets you give five times as much, up to $75,000 per contributor, as a lump sum contribution. This lump sum contribution will be treated as though it occurred over a 5-year period. 

Earnings in a 529 plan accumulate on a tax-deferred basis and are entirely tax-free if used to pay for qualified higher education expenses.

The earnings portion of a non-qualified distribution may be subject to income taxes and a 10% tax penalty. There are exceptions to the 10% tax penalty, such as the extent to which the non-qualified distribution is due to the receipt of a tax-free scholarship, the American Opportunity Tax Credit or Lifetime Learning Tax Credit, employer-paid tuition assistance, attendance at a U.S. Military Academy, or the beneficiary becomes disabled. There may also be recapture of any state income tax breaks attributable to the non-qualified distribution. 

What is the one thing everyone misunderstands about withdrawing 529 money?

Distributions from a 529 plan should be taken in the same tax year as the qualified expenses.

Does the student have to file a tax return when receiving distributions from a 529 plan?

A non-qualified distribution from a 529 plan will need to be reported on the beneficiary’s income tax returns. The beneficiary will receive a 1099-Q from the 529 plan that lists the distributions during the tax year. Only the portion of the distributions that are non-qualified must be reported on the beneficiary’s income tax returns. Keep documentation corresponding to the qualified portion of the distribution, such as copies of receipts.

Qualified distributions are tax-free and are not reported on income tax returns. The definition of a qualified distribution may different on federal and state income tax returns, since some states do not fully comply with the federal definition of qualified educational expenses, especially with regard to K-12 tuition and student loan repayment. 

Questions about 529 Plan Investment Strategy

How should the stock market’s performance affect — or not affect — your 529 savings strategy?

Pulling money out of a 529 plan during an economic downturn merely locks in losses. It is better to stay invested, so that you don’t miss out on the economic recovery. 

For example, the S&P 500 went down by as much as a third in February and March 2020, but has since recovered most of the losses.

Another example involves the stock market crash that occurred in 2008 and 2009. From June 2008 to February 2009, the S&P 500 dropped 60% in value, but doubled in value in the next two years. 

If a 529 plan is invested in an age-based asset allocation, the impact of a bear market should be minimal if the student will be enrolling in college within a year or two or is already in college. Most age-based asset allocations bottom out at 10% in stocks, so a one-third drop is just a 3% loss, which is partially compensated for by investments in bonds. 

If the child is young, an age-based asset allocation has a higher percentage invested in stocks, but there is less money invested and the family has time to recover from the losses.

If you suffered big losses in your 529 plan, you might consider waiting for the stock market to recover before taking a distribution. For example, you could pay for this year’s college costs with student loans and use the 529 plan to repay the student loans later. 

A good strategy is to set up the 529 plans with automatic investments and to not change anything even if the stock market drops. Just ignore the ups and downs of the stock market. Automatic investment also provides the benefit of dollar-cost averaging.

If you are worried about stock market performance reducing your college savings, save more. 

If you don’t already have an emergency fund with half a year’s salary, now would be a good time to start an emergency fund, just in case you lose your job. 

How risky is it to save for college in a 529 plan?

Investing in a 529 plan involves investing in the stock and bond markets, which present a risk of investment loss. Given that there are at least three market corrections and at least one bear market in any 17-year period, risk is unavoidable. 

However, there are ways of balancing the risk and return of investing in a 529 plan. For example, an age-based asset allocation, kind of like a target date fund, starts off with a high percentage invested in stocks when the child is young and gradually shifts to a lower percentage invested in stocks as college approaches. If you are risk-averse, 18 of the 529 plans offer FDIC-insured investment options.

Is there a guaranteed rate of return for a 529 plan?

Some 529 plans offer investment options with a guaranteed rate of return, such as Certificates of Deposit (CDs). The returns on a CD, however, may be lower than the return on riskier investments.

Questions about Alternatives to 529 Plans

In what circumstances would another college savings strategy be a better choice than a 529 plan?

If you are reasonably certain that the child will go to college, a 529 plan is usually the best choice. 529 plans have superior tax and financial aid advantages compared with other options.

If you have serious doubts as to whether the child will go to college, a Roth IRA might be better, since it will give the child a head start on saving for retirement. 

However, distributions from a Roth IRA, even a tax-free return of contributions, will count as income on the Free Application for Federal Student Aid (FAFSA), reducing eligibility for need-based financial aid by as much as half of the distribution. There are workarounds, such as waiting to take a distribution until it will no longer affect financial aid eligibility (e.g., after January 1 of the sophomore year in college if the child will graduate in four years). You can also borrow student loans and use the Roth IRA to repay the loans after graduation.

What are the main pros and cons of 529 plans?

The advantages of 529 plans include the more favorable financial aid treatment, the tax benefits (including state income tax breaks on contributions to the 529 plan), five-year gift tax averaging and age-based asset allocation. The account owner retains control over the account. Automatic investing makes it easier to save. There are no age or time limits. 

The main disadvantages of using a 529 plan are the funds must be used for education or you’ll have to pay a 10% tax penalty, there are a limited number of investing choices, some 529 plans have high fees, and 529 plans that are owned by someone other than the child or parent will hurt eligibility for need-based financial aid. Also, some states do not comply with the federal definitions of qualified expenses and some states will recapture state income tax breaks if you roll over the 529 plan to a different state’s 529 plan.

Is a prepaid tuition plan better or worse than a 529?

There are several problems with prepaid tuition plans.

Prepaid tuition plans work well when the stock market is growing, but not as well during an economic downturn, when they get squeezed by above-average tuition inflation and stock market losses. 

With a 529 college savings plan, you get all of the return and can manage the risks.

How do 529 plans compare to custodial savings accounts like UTMAs and UGMAs?

The Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) allow minor children to hold assets by appointing an adult, the custodian, to manage the assets on behalf of the child until the child reaches the age of majority for their state. The age of majority is 18, 19 or 21, depending on the state. 

Often, the terms UGMA and UTMA are used to refer to a custodial bank or brokerage account that complies with the requirements of the respective act.

A custodial bank or brokerage account (UGMA or UTMA) does not have the tax or financial aid advantages of a 529 college savings plan. 

The income on a custodial bank or brokerage account is taxed annually, while the earnings on a 529 plan are tax-deferred and entirely tax-free if used to pay for qualified education expenses. 

The Free Application for Federal Student Aid (FAFSA) assesses 20% of assets in a custodial bank or brokerage account as reducing the student’s eligibility for need-based financial aid. 

This is in contrast with a 529 plan that is owned by the student (a custodial 529 plan account) or the student’s parent, which are treated as parent assets on the FAFSA, reducing aid eligibility by at most 5.64% of the asset value. 

Thus, $10,000 in a custodial bank or brokerage account reduces aid eligibility by $2,000, while $10,000 in a 529 college savings plan account owned by the student or parent reduces aid eligibility by at most $564.

If you haven’t saved enough in a 529 plan, what are your best alternatives for paying for college?

529 plans are the antidote to student loan debt. If you don’t save enough, you may have to borrow to make up the shortfall in college savings.

There are a few alternatives that can help you pay for college.

At, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.

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Saving For College is an unbiased, independent resource for parents and financial professionals, providing them with information and tools to understand the benefits of 529 college savings plans and how to meet the challenge of increasing college costs.