Saving and investing
How Do 529 Plans Work?
A 529 plan is a tax-advantaged investment account for education. Money grows without federal tax, and withdrawals are tax-free when spent on qualified education costs. Saving $200 a month from birth at a 6% return builds about $77,471 by age 18; starting at age 5 builds about $47,089.
Last updated: October 20, 2026
The tax advantage in one sentence
Contributions are made with after-tax dollars, but earnings grow tax-deferred and come out federally tax-free when used for qualified education expenses. Many states also give a state income tax deduction or credit for contributions to their own plan.
What counts as a qualified expense in 2026
- College and graduate school: tuition, fees, books, supplies, required equipment, computers and internet access, and room and board for students enrolled at least half-time.
- K-12: up to $20,000 per student per year starting in 2026 (up from $10,000). Beyond tuition, this now includes curriculum and instructional materials, tutoring, standardized and AP test fees, dual enrollment fees, and educational therapies for students with disabilities.
- Career credentials: recognized certificate and licensing programs, such as trade, CDL, and professional exam preparation, now qualify.
- Student loans: up to $10,000 lifetime per borrower.
Check your state's rules: some states do not treat K-12 or credential withdrawals as qualified for state tax purposes.
How much a 529 can grow
$200 a month at a 6% annual return, until age 18
| Start age | Years saving | Contributed | Value at 18 |
|---|---|---|---|
| Birth | 18 | $43,200 | $77,471 |
| 5 | 13 | $31,200 | $47,089 |
| 10 | 8 | $19,200 | $24,566 |
Starting at birth instead of age 10 more than doubles what you put in, but nearly triples the ending value, because the early dollars compound the longest. At $500 a month from birth, the balance reaches about $193,677.
Unused money: Roth IRA rollovers and other options
If the beneficiary does not need all of it, you can change the beneficiary to another family member, keep it for graduate school, or roll up to $35,000 over the beneficiary's lifetime into their Roth IRA. Rollover rules: the 529 must have been open more than 15 years, money contributed in the last 5 years is not eligible, each year's rollover counts toward the annual Roth IRA limit ($7,500 in 2026), and the beneficiary needs earned income at least equal to the rollover.
A non-qualified withdrawal is not a disaster: only the earnings portion is taxed as income and charged a 10% penalty. The penalty is waived if the student gets a scholarship (up to its amount), attends a US military academy, becomes disabled, or dies.
Gift tax and "superfunding"
Contributions count as gifts. In 2026 you can give up to $19,000 per beneficiary without filing a gift tax return. A special 5-year election lets you contribute five years at once: up to $95,000 per beneficiary, or $190,000 for a married couple, which gives that money more time to compound.
Financial aid impact
A parent-owned 529 is reported as a parent asset on the FAFSA, which reduces aid eligibility far less than money in the student's name. Grandparent-owned 529s are no longer reported on the FAFSA.
Key takeaways
- Earnings grow federally tax-free when spent on qualified education.
- From 2026, K-12 withdrawals can reach $20,000 per student per year and cover more than tuition.
- Up to $35,000 of unused money can roll into the beneficiary's Roth IRA after 15 years.
- $200 a month from birth at 6% grows to about $77,471 by 18.
- Non-qualified withdrawals tax only the earnings, plus a 10% penalty with several exceptions.
Frequently asked questions
Do I have to use my own state's 529 plan?
No. You can use any state's plan, but your state's tax deduction may only apply to its own plan.
What happens to a 529 if my child does not go to college?
You can change the beneficiary, use it for trade school or credentials, roll some into a Roth IRA, or withdraw it and pay tax plus a 10% penalty on the earnings only.
Is there a maximum 529 balance?
There is no annual federal limit, but each state sets a lifetime maximum, typically several hundred thousand dollars per beneficiary.