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529 Plan: The Smart Way to Save for College

529 Plan


529 plans are government-sponsored investment accounts designed to help individuals save for future education expenses. 529 plans, named after Section 529 of the Internal Revenue Code, are sponsored by states, state agencies, or educational institutions and are authorized by Congress.

There are two main categories of 529 plans: prepaid tuition plans and college savings plans.

With a prepaid tuition plan, the purchaser can buy credits at present prices to be used for tuition and fees at a later date at participating educational institutions.

These plans offer tax benefits and are authorized by Congress under Section 529 of the Internal Revenue Code. College savings plans allow the account owner to contribute funds to an investment account to be used for future education expenses.

Pros of 529 Plans:

Tax advantages: Contributions to a 529 plan are typically tax-free at the federal level and may also be tax-free at the state level. Earnings on the investments within the plan grow tax-free as well, as long as they are used for qualified education expenses.

Flexibility: 529 plans can be used at a wide variety of institutions, including public and private colleges and universities, as well as some technical and vocational schools.

Control: The account owner maintains control over the funds in a 529 plan, rather than the beneficiary. This can be beneficial if the beneficiary decides not to pursue higher education or receives scholarship funds.

Cons of 529 Plans:

Limited flexibility: While 529 plans can be used at a wide range of institutions, they can only be used for qualified education expenses, such as tuition, fees, and certain room and board costs. If the funds are not used for these purposes, they may be subject to taxes and penalties.

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Investment risk: The value of the investments within a 529 plan may fluctuate, and there is the potential for the account to lose value.

Limited contributions: There are limits on the amount that can be contributed to a 529 plan, which varies by state.

An alternative for this option will be a federal student loan.

What to consider when choosing a 529 plan:

Tax benefits: Some states offer tax deductions or credits for contributions to their own 529 plans. It may be worth considering a 529 plan from your state for this reason.

Investment options: Different 529 plans offer different investment options, such as age-based portfolios or individual mutual funds. Consider the options available and choose one that aligns with your investment strategy.

investment options

Fees: 529 plans may have fees associated with them, such as annual maintenance fees or fees for each transaction. These fees can eat into the returns of the plan, so it’s important to compare the fees of different plans to ensure you are getting the best value.

Beneficiary: It’s important to consider who the beneficiary of the 529 plan will be. If you are saving for your own education, you will be the beneficiary. If you are saving for a child or grandchild, they will be the beneficiary. Make sure to consider their future education plans when choosing a 529 plan.

Contribution limits: As mentioned earlier, there are limits on the amount that can be contributed to a 529 plan. Make sure you are aware of these limits and plan your contributions accordingly.

Estate planning: If you are considering using a 529 plan as part of your estate planning strategy, it’s important to consult with a financial planner or tax professional to ensure that it aligns with your overall goals.

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529 Plans by the Numbers: What You Need to Know

  1. As of 2021, there are over 12 million 529 plan accounts open in the United States, with total assets of over $400 billion.
  2. The average 529 plan account balance is around $25,000.
  3. More than half of all 529 plan assets are held in college savings plans, rather than prepaid tuition plans.
  4. The states with the highest number of 529 plan accounts are California, Texas, and Florida.
  5. The states with the highest average account balances are Maryland, New Jersey, and Connecticut.
  6. Over 60% of 529 plan account holders are parents saving for their children’s education.
  7. Almost 80% of 529 plan assets are invested in mutual funds.
  8. The most popular investment options within 529 plans are age-based portfolios, which automatically adjust the investment mix as the beneficiary gets closer to college age.
  9. The top five institutions receiving funds from 529 plans are the University of Phoenix, Arizona State University, Grand Canyon University, Brigham Young University, and the American Public University System.
  10. In 2019, the total amount of funds distributed from 529 plans for qualified education expenses was over $33 billion.


A 529 plan can be a useful tool for saving for future education costs, offering tax advantages and flexibility. However, it’s important to consider the pros and cons and do your research to choose the right plan for your specific situation.

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