Nine Things to Know About 529 Plans

By Huntington Learning Center

A 529 plan offers a range of tax and other benefits for parents putting away money for their children’s college education. You might already know this if you have one set up for your child, but if not, here are a few essentials about this excellent college savings plan:

  1. The 529 plan’s biggest benefit: tax-free growth. Earnings on 529 plans’ contributions grow federal tax-free. Earnings are taxed when the money is withdrawn for college.
  2. Many states offer a full or partial tax deduction or credit for 529 plan contributions. Over 30 states offer this opportunity for each year you contribute to the 529 plan. State income tax benefits vary in different states, so it’s best to check with your financial advisor on the rules.
  3. Mom and Dad have control over the plan. You, not the named beneficiary of the 529 plan, stay in control of the 529 account you open. That means you can make sure your child uses the account for college costs.
  4. Everyone can take advantage. There are no income limits, age limits or annual contribution limits on 529 plans. However, there are lifetime contribution limits, which vary by plan (ranging from $235,000 to $520,000).
  5. Funds can be used at college or K-12 schools that charge tuition. The full value of your 529 plan can be used at any eligible college or university, including some international institutions. As of January 2018, 529 plan savings can also be used to pay for tuition expenses at private, public or religious elementary or secondary schools, up to $10,000 per year, per beneficiary.
  6. Yes, 529 plans affect college financial aid, but not much. Assets in 529 accounts owned by a parent are considered parental assets on the Free Application for Federal Student Aid (FAFSA). The first $20,000 of parental assets aren’t counted in the Expected Family Contribution (EFC) calculation. If you save more than that, a maximum of 5.64% of parental assets are counted (as compared to other student assets, which are counted at 20%).
  7. What does that mean? Higher EFC means less financial aid. So, while 529 plan funds increase your EFC, it’s minimal, especially compared to other student assets. Also, qualified 529 distributions to pay for college expenses are not included in the base-year income that reduces college financial aid eligibility each year. And 529 accounts owned by a grandparent, other relative or family friend have no effect on a student’s FAFSA.
  8. If you don’t use the 529 plan funds for college, there are some penalties. The good news is they’re minimal. If you withdraw from a 529 plan for something other than college costs, the earnings are subject to a 10% withdrawal penalty (and an additional 2.5% state tax penalty in California). Your contributions will never be subject to tax or penalty (because you make contributions with after-tax dollars).
  9. There are exceptions to the 529 plan withdrawal penalty. The 10% penalty is waived if the 529 plan beneficiary passes away, becomes disabled, receives tax-free assistance (like a large scholarship), receives tuition assistance from an employer (there are some rules to this, of course), or attends a U.S. military academy.

College is expensive. The 529 plan is an excellent vehicle for college savings, and investing in one earlier in your child’s life means you benefit from compounded earnings. Contact your financial advisor with questions and to learn about the best 529 plan options in your state.

Information referenced from, an independent resource for parents and financial professionals. You can learn more about 529 plans’ tax benefits at