How to open a 529 plan

A 529 plan is a tax-advantaged investment plan designed to help pay for the costs of your children’s education. In addition to college tuition, 529 plan funds can also be used for K-12 school tuition.

There are many advantages to opening a 529 plan, but among the top are the tax advantages. Contributions plus any earnings grow tax-deferred and remain tax-free if the funds are withdrawn to pay for qualified educational expenses.

However, 529 plans come with stipulations and options. Here’s what you need to know.

How to open a 529 plan

The first step is to understand who’s eligible. While 529 accounts are generally established by parents or grandparents on behalf of a child (the account’s beneficiary), anyone can open a 529 plan to fund educational expenses now or in the future. Similarly, anyone can be the beneficiary of a 529 plan as long as they’re a U.S. citizen or resident alien with a Social Security number or tax identification number.

To get started, research your state’s plans. Every state offers a 529 plan, and each state’s plan has its own set of advantages and stipulations. A few key things to look for:

• Any potential enrollment fees, annual maintenance fees, or minimum contribution amounts
• Whether or not your state follows federal 529 rules or if there are deviations
• If your state offers a tax deduction or credit for contributions, find out if the benefit applies when you open any state’s 529 plan or only if you open your resident state’s 529 plan

A directory of state-specific plans and incentives is available at savingforcollege.com.

The information needed to open a 529 account may vary based on your state’s plan options, but typically, you’ll need the beneficiary’s date of birth and Social Security number. Whoever opens the account for them will need to provide the same information.

529 plan options

Be sure to understand all costs associated with the plans you’re comparing. Before opening a 529, research whether your state of residency offers a plan (whether advisor-sold or direct-sold) that provides a state tax deduction for making contributions.

Advisor-sold vs. direct-sold 529 plans

• Advisor-sold plans are offered through an advisor, managed professionally and can include broader investment options. Additional costs apply.
• Direct-sold plans are offered directly through a state to its residents or non-residents.

529 plans vs. prepaid tuition plans

• A 529 plan allows contributions to be invested and any gains are tax deferred. Assets in the 529 plan can be used for many qualified expenses to most any educational institution.
• Prepaid, state-offered tuition plans allow residents to secure only future tuition costs at today’s rates. There may be limitations on the educational institution accepting the prepaid tuition plan.

What a 529 plan can be used for

Here are some of the qualified education expenses you can pay with your 529 plan:

• K-12 tuition up to $10,000 per year/per student
• College tuition and fees, including:
  • Room and board
  • Off-campus rent when student is at least part-time
  • Books and supplies
  • Computers and software used for college
  • Educational special services
• Payment of college loans up to a lifetime maximum withdrawal of $10,000
• Tuition and qualified expenses for apprenticeship programs

What a 529 plan cannot be used for

These are some of the non-qualified college expenses for which a withdrawal would be subject to income tax and a 10% withdrawal penalty on earnings:

• Electronic devices used primarily for everyday or entertainment purposes, such as mobile phones
• Sports or club activity fees
• Student loan payments above $10,000
• Transportation/travel/parking
• College application fees
• ACT, SAT, or other college prep examination fees
• K-12 tuition withdrawals above $10,000 per year

Benefits of 529 plans

529 plans offer a range of benefits: flexibility, open contributions and potential tax advantages.

• Ownership is flexible. There is no requirement to turn account ownership over to the beneficiary at a certain age. When a 529 plan is opened, a parent is generally named as the owner; however, a grandparent, aunt, or uncle can also be named as owner. Be sure to understand financial aid considerations in ownership.
• Accounts are transferable. Should the original beneficiary choose not to attend college (or doesn’t need the funds for another reason, such as a scholarship), the beneficiary can be changed to another relative of the original beneficiary without tax consequences.
• Contributions are flexible. The amount you put in is flexible, and contributions can be as low as $15 a month. In 2025, you can contribute up to $19,000 ($38,000 per married couple) per beneficiary to qualify for the annual gift tax exclusion.
• Anyone can contribute. Friends and other family members can contribute to an established 529 plan account to help build funds for education costs.
• Provides for legacy planning. In addition to paying for education, 529 plans can be used for certain estate and tax planning strategies. For example, you can choose to contribute a lump sum of up to $95,000 (or $190,000 for joint contribution) in 2025 and elect to have the contribution considered “spread” over the next five years. This essentially allows you to use five years of annual gift exclusions in one year. This larger gift wouldn’t be subject to the gift tax if the person who made the gift lives for the full five years. This feature can be an effective strategy for long-term estate and gift planning, as the larger upfront gift helps to remove those assets from the donor’s estate and maximize compound growth inside the 529 plan. Talk to a financial professional and tax professional for more details.

Opening a 529 plan as a part of your investment strategy

Depending on your overall investment and portfolio strategy, you can choose between a static or age-based strategy when structuring your 529 plan’s investments inside the 529 plan account.

• Static portfolio options allow you to have control over the allocation of equity and fixed-income percentages by selecting among portfolios managed to a more specific stated investment objective.
• Age-based portfolio options are set up to reallocate over time and become more conservative as college enrollment approaches.

529 plan final considerations

When should I enroll?

You can start investing as early or as late as you want. However, opening a 529 plan early and making regular contributions may benefit your overall strategy.

How will a plan impact FAFSA eligibility?

Assets owned by a dependent student or a parent/s are considered parental assets. When determining whether a student qualifies for financial aid, only 5.64% of 529 account balances are counted as parental assets. Assets of a 529 plan owned by a grandparent or third party have no effect on FAFSA eligibility.

Distributions made from 529 plans, regardless of who owns the account, are not considered part of a student’s income and won’t impact their financial aid eligibility in subsequent years.

Learn how we can help you plan for your children’s education.

For more information regarding college savings plans, please visit www.collegesavings.org. Participation in a 529 plan does not guarantee the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses. Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state. Federal income tax on the earnings and a 10 percent penalty on distributions for non-qualified expenses may apply.