What is a 529 plan and how does it work?

A 529 plan is a tax-advantaged investment account designed to help families save for education expenses. You contribute after-tax money, which then grows tax-free. Withdrawals are also tax-free when used for qualified education expenses like tuition, fees, books, and room and board at eligible institutions.

Can I use a 529 plan for K-12 education?

Yes, as of 2017, you can use a 529 plan to pay for up to $10,000 per beneficiary per year in tuition expenses for public, private, or religious elementary or secondary schools (K-12). However, check your state's specific rules, as some states may not conform to this federal provision.

What are qualified education expenses for a 529 plan?

Qualified education expenses are broad and include tuition and fees, books, supplies, and equipment required for enrollment, room and board (for at least half-time students), computers and related services, and up to $10,000 per year for K-12 tuition. As of 2024, they also include up to $10,000 in student loan payments and costs for certain apprenticeship programs.

What happens if my child doesn't go to college or gets a scholarship?

If your child doesn't use all the funds, you have several options. You can change the beneficiary to another eligible family member (like a sibling or parent) without tax penalties. As of 2024, you can also roll over up to $35,000 of unused funds to the beneficiary's Roth IRA, subject to certain conditions. You can also withdraw the funds for non-qualified purposes, but the earnings portion will be subject to income tax and a 10% federal penalty.

How does a 529 plan affect financial aid?

529 plans owned by a parent are considered a parental asset on the FAFSA and have a relatively minor impact on financial aid eligibility (assessed at a maximum of 5.64% of their value). Grandparent-owned 529 plans are not reported as assets, but withdrawals from them count as student income, which can significantly reduce aid eligibility in subsequent years.

Are there income limits to contribute to a 529 plan?

No, there are no federal income limits for contributing to a 529 plan. Anyone, regardless of income, can contribute. However, there are lifetime maximum contribution limits set by each state, typically ranging from $300,000 to over $500,000 per beneficiary.

Can I change my 529 plan's investment options?

Yes, you can change the investment options for the funds already in your 529 plan, but federal rules generally limit these changes to two times per calendar year. New contributions can always be directed to any available investment option.

529 Plan: Complete Guide to Education Savings | One Percent…