529 Plan
A tax-advantaged savings account designed to fund qualified education expenses.
What is 529 Plan?
A 529 plan is a state-sponsored, tax-advantaged investment account designed to pay for qualified education expenses including college tuition, fees, books, room and board, and K-12 tuition up to $10,000 per year. Contributions grow tax-deferred and withdrawals for qualified expenses are completely tax-free at the federal level; many states also provide a deduction or credit for contributions to their own plan. Beginning in 2024, unused funds can be rolled over into a Roth IRA (subject to contribution limits and a 15-year ownership requirement), reducing the risk of over-saving. There are no income limits and no annual contribution caps, though accounts are subject to gift tax rules. Families may front-load five years of contributions in a single year through "superfunding."
Example
A parent opens a 529 plan when their child is born and contributes $500 per month. Assuming 7% average annual returns over 18 years, the account grows to approximately $197,000. All investment gains are tax-free when used for qualified college expenses. The tax savings on the gains — which might otherwise be subject to capital gains tax — could amount to $15,000 or more compared to a taxable brokerage account.
Source: IRS — Topic 313: Qualified Tuition Programs (529 Plans)