what is a 529 plan 
as the cost of higher education continues to rise and the problems of many americans spending much of their adulthood mired in student debt is readily apparent many are turning to tax advantaged 529 savings plans to help fund their children s education named after section 529 of the internal revenue code irc these plans were originally designed to cover postsecondary education costs their scope has greatly expanded in the last decade in 2017 and 2019 respectively congress passed legislation allowing 529 plans to cover the costs of k 12 education and apprenticeship programs 1 later the setting every community up for retirement enhancement secure act of 2019 and the secure 2 0 act of 2022 permitted 529 funds to be used for student loan repayment and roth ira contributions 23there are two main types of 529 plans despite their advantages the education data initiative estimated in 2023 that only about 30 of american college savings are held in 529 accounts nevertheless those who do use them contribute an average of over 7 500 annually 6understanding 529 plansalthough 529 plans take their name from section 529 of the federal tax code they are administered by the 50 states and the district of columbia 7anyone can open a 529 account but parents or grandparents typically establish them on behalf of a child or grandchild the account s beneficiary in some states the person who funds the account may be eligible for a state tax deduction for their contributions the money in a 529 plan grows tax deferred until it is withdrawn what s more as long as the money is used for qualified education expenses as defined by the internal revenue service irs withdrawals aren t subject to either state or federal taxes in addition some states may offer tax deductions on contributions 4for k 12 students tax free withdrawals are limited to 10 000 annually 8since tax benefits vary from state to state you should check the details of any 529 plan to understand the specific tax benefits to which you may be entitled types of 529 plansthe two main types of 529 plans have some significant differences of the two types 529 savings plans are more common the account holder contributes money to the plan which is invested in a preset selection of investment options account holders can choose which investments usually mutual funds they want to make how those investments perform determines how much the account value grows over time many 529 plans offer target date funds which adjust their assets as the years go by becoming more conservative as the beneficiary approaches college age withdrawals from a 529 savings plan can be used for college and k 12 qualified expenses qualified expenses include tuition fees room and board and related costs 9the secure act of 2019 expanded tax free 529 plan withdrawals to include registered apprenticeship program expenses and up to 10 000 in student loan debt repayment for account beneficiaries and their siblings 3the secure act of 2022 passed as part of the 2023 omnibus funding bill permits rolling over up to 35 000 of unspent funds in a 529 account into a roth ira account the account must be at least 15 years old to qualify 1011prepaid tuition plans are offered by a few states and some higher education institutions they vary in their specifics but the general principle is that they allow you to lock in tuition at current rates for a student who may not be attending college for years to come prepaid plans are not available for k 12 education as with 529 savings plans prepaid tuition plans grow in value over time eventual withdrawals from the account used to pay tuition are not taxable however unlike savings plans prepaid tuition plans do not cover the costs of room and board prepaid tuition plans may place a limit on which colleges they may be used for by contrast the money in a savings plan can be used at almost any eligible institution in addition the money paid into a prepaid tuition plan isn t guaranteed by the federal government and may not be guaranteed by some states 9 be sure you understand all aspects of the prepaid tuition plan before you use it there are no limits on how much you can contribute to a 529 account each year however many states cap the total amount you can contribute over time ranging from 235 000 to 575 000 12tax advantages of 529 planswithdrawals from a 529 plan are exempt from federal and state income taxes provided the money is used for qualified educational expenses any other withdrawals are subject to taxes plus a 10 penalty with exceptions for certain circumstances such as after death or disability 9contributions to a 529 plan aren t tax deductible for federal income tax purposes however more than 30 states provide tax deductions or credits of varying amounts for these contributions 12you need to invest in your home state s plan if you want a state tax deduction or credit however some states will allow you to invest in their plans as a nonresident if you re willing to forgo a tax break in 2024 the annual gift tax exclusion has increased to 18 000 up from 17 000 in 2023 this means that you can give up to 18 000 per year to any individual without it counting against your lifetime gift tax exemption which has also increased to 13 61 million for single filers and 27 22 million for married couples filing jointly up from 12 92 million and 25 84 million in 2023 respectively this background on gift taxes is important for 529 plans since there are additional tax advantages for those who wish to contribute to the savings of a future college student you can contribute up to five years worth of annual gift tax exclusions in a single lump sum without triggering gift tax consequences for instance in 2024 a grandparent could make a one time contribution of 90 000 to their grandchild s 529 plan 18 000 annual exclusion x five years as long as the grandparent does not make any additional contributions to the same beneficiary over the next five years this lump sum contribution will not count against their lifetime gift tax exemption 131benefits and potential drawbacks of 529 plans529 plans vs brokerage accountseducation savings accountinstitutionally sponsoredlimited investment optionstax deferred growthtax exempt withdrawals for qualified education expensesannual contribution limitsgeneral investment accountself sponsoredno limits on investment optionsgains and dividends are taxedno tax exemptionsno contribution limits