529 Savings Plans: An Online Guide for College Students

From understanding the basics to opening your account, learn the advantages of a 529 college savings plan, take away expert advice, and get started saving today.

Last Updated: 08/21/2020

Meet the Expert
Matt Hylland

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Matt Hylland is a partner and financial planner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa, a fiduciary, fee-only investment advisor. Matt specializes in comprehensive, holistic financial planning that incorporates not only investments, but estate, tax, and education planning as well. Matt has been featured in The Wall Street Journal, CNBC, Kiplinger, and other nationally recognized finance publications.

It’s easy to sweat when crunching the numbers. Between 1989 and 2016, the cost of college in the U.S. increased eight times faster than the average yearly wage. And while this uneven growth can make the most financially responsible parents stress over the thought of tuition, saving for college is still more than manageable.

Opening a 529 savings plan can be a smart way to take advantage of tax benefits while simultaneously growing a college fund. Families that start a 529 plan when their children are young can benefit from enormous tax savings and significant earning on their investments over time. Provided you use the money on education-related expenses, the 529 plan can be hard to beat, especially for families with more than one kid. To learn more about the advantages and benefits of a 529 plan and to see how it stacks up against your other college savings options, keep reading.

How 529 Plans Work

529 plans are state-run tax-advantaged savings plans that were originally designed for prospective college students and their families to help save tuition money. The plan works by contributors putting funds into an account that are invested in various ways such as in bonds and stocks. After the money grows over time, the account owner removes the money for the beneficiary’s education expenses.

There are two types of 529 plans: one where you simply accrue money in a savings account, and one where you buy college credits or units. The educational savings plan functions more like a traditional savings account and is intended to help you cover the cost of tuition and fees, school technology expenses, books, and room and board. The prepaid tuition plans allow you to buy units or credits at those schools that participate in this program at their present-day prices and avoid some inflated tuition costs in the future.

Anyone can open a 529 plan, including parents, guardians, and family members of the student beneficiary, and any of those people can contribute money to the savings account. In 2019, the plan was expanded to include K-12 expenses as well, making it an even more appealing plan. Today, 34 states offer state income tax deductions on contributions to these 529 plans, ultimately saving the contributor money on their taxes each year. In fact, when you follow the guidelines and use the money for educational expenses, the money is tax-free.

How a 529 Plan Stacks Up

Coverdell Education Savings Accounts

The Coverdell ESA is a U.S. government tax-deferred trust account to help families save money for students who are 18 years old or younger. These funds may be used for K-12 and college educational expenses.


Parents receive tax-free growth on the account and tax-free withdrawals provided the money is used for educational expenses. The accounts are in the parent’s or guardian’s name and do not affect the beneficiary’s eligibility for financial aid.


Family members can only contribute up to $2,000 per year for each beneficiary. All funds must also be distributed to the beneficiary before they turn 30 years old or the account holder will face a 10% penalty.

How it compares/who’s it for

The Coverdell ESA account may offer more investment opportunities than the 529 plans. Prospective investment categories include the stock market, precious metals, and real estate.

UGMA/UTMA accounts

A UGMA or UTMA custodial account can be opened at most types of financial institutions such as a credit union, mutual fund company, bank, or brokerage firm by a parent or guardian on behalf of a minor. Depending on the state, the money accrued in the custodial account can be transferred to the beneficiary when they reach the designated age, usually between 18 to 21. Funds in UTMA accounts may come from a wide range of sources, including real estate, bonds, stocks, and insurance account assets.


Friends, family members, and outside donors are able to contribute money to the custodial account. When the beneficiary becomes the designated age and receives access to the money in the account, there are no rules on how and where the money can be spent.


UGMA accounts hold only investments in the form of stocks, bonds, insurance-related investments, and mutual funds. For both types of custodial accounts, the financial institution hosting the account engages in the buying and selling of higher-risk investments without the consultation of the custodian, parents, or guardian. Custodial accounts can also affect a student’s eligibility for financial aid. As of January 2020, Vermont and South Carolina do not permit UTMA accounts.

How it compares/who’s it for

In terms of tax benefits, the IRS taxes the minor/beneficiary at the minor’s tax rate, not the custodian’s, for up to $2,100 in earnings. UGMA or UTMA custodial accounts can reduce a student’s eligibility for need-based financial aid by about 20-25%, while the 529 plan’s maximum reduction is 5.64%.

Roth IRA

The Roth IRA was designed to be a retirement account but is often used for college savings because of tax-free growth on earnings. You can open them at a brokerage firms or bank. Adults need to open a custodial Roth IRA for those under 18 years old.


Roth IRA money can be used for education expenses or transferred to retirement income with no penalties or tax issues. Roth IRA money inside the account is not figured against a student’s financial aid eligibility. The owner of the Roth IRA can withdraw the amount they have contributed at any time without penalty.


Only the contribution portions of Roth IRAs (not the earnings) can be withdrawn tax-free when used for education expenses. All of one’s Roth IRA withdrawals are considered to be income on the FAFSA and can affect a student’s financial aid eligibility, even if the IRS doesn’t consider it taxable income.

How it compares/who’s it for

Roth IRAs can be a good choice for people who live in states that don’t offer tax breaks on 529 plans. In general, the Roth IRA offers fewer tax breaks than the 529, provided that the money is spent on education.

Advantages of 529 College Savings Plans


Anyone can contribute to the plan

Grandparents, parents, relatives, and the student themselves can put money in the pot. Anyone contributing to a 529 plan can claim the appropriate deductions on their state income taxes. The amount of tax benefits you receive depends on where you live and how much money you’ve contributed to a 529 plan during the year.


The 529 plan can be changed without penalty to another beneficiary as long as the new individual is a relative

This may be a good thing for parents and guardians who aren’t sure if their intended beneficiary is going to go to college after all. Should the prospective student become a successful rock star or entrepreneur before freshman year, for example, the plan can be assigned to someone else who will go to college or vocational school. As long as there is a beneficiary listed on the account, it can remain open.


When used for education expenses, the money you take out of the account will be tax-free.


Up to $10,000 per year from a savings plan can be used for tuition and expenses at private and public institutions

Beginning in late 2019, the government also authorizes 529 money to be used to pay back the beneficiary’s student loans, or their siblings’ student loans, up to $10,000.


Tax-free growth and tax-free withdrawals

There are a wide range of investment options for 529 savings plans, including mutual funds and the stock market. The great thing about 529s is that the money that’s made in those accounts can grow each year without being subject to federal income taxes.

4 Steps to Opening Your 529 Plan

Now that you know a bit about how the 529 plan can work for you, what does the process of opening the account look like? Here’s a list of steps that can take you where you need to be and make sure you’re covering your bases in the process.

Step 1

Pick a State

If you’re choosing to invest in a prepaid tuition plan, you’ll probably need to choose the plan for the state where you live. 529 education savings plans, on the other hand, do not necessarily require you to open an account in your state of residence. Since you’re looking for the excellent state income tax benefits, it’s smart to look at the other state plans with promising investment options and low costs and fees.

Step 2

Submit Your Application

You’ll fill out an application online or submit a hard copy through the mail. Most applications require you to include the necessary banking information as well as your and the beneficiary’s social security numbers, mailing addresses, and birth dates. Usually there’s only one owner per 529 plan, even for married couples. The beneficiary can be anyone, including your child, a relative, a friend, or yourself.

Step 3

Pick a Successor

In the event that you pass away or become incapacitated in some way, you will need to have someone on file to manage the account. This may not be a requirement in all 529 applications, but it is certainly a good idea to have someone prepared to take it over if necessary.

Step 4


At this point in the process, you will have to pay any necessary upfront fees, like an application fee, and make a payment toward the plan. Some 529 plans require a minimal contribution upfront when you set up the account. Once the account is officially open, any of your friends or family can make a contribution. This can often be carried out using an online bank transfer or mailing in a check. The state where you have your plan may have some restrictions on how much money can go into the 529 account. Most recently, the federal government required that gift tax be paid on individual contributions above $15,000 per beneficiary.

Things to Keep in Mind About 529s

Like any type of financial investment, there’s going to be some things to keep an eye on, including the types of risks you’re taking. Additionally, there are some general guidelines and stipulations to expect with 529 plans that need to be considered in order to get the most out of your investment. Here’s a list of important things to remember.

  • When funds are withdrawn, they must be used for education expenses such as room and board, tuition and fees, books, and necessary technology expenses. If it turns out that the beneficiary wants the funds and will not use them for college purposes, or for tuition at a secondary or elementary school, they will pay taxes on the account’s earnings in addition to a 10% penalty fee.
  • Fees and general underlying costs can affect your overall earnings in a 529 account. The types of fees and costs you’ll incur depend on which state your account is located in and if you have a plan through a financial advisor. Secondly, you may take on additional costs for the types of investments that are made with the money in the account, such as mutual funds. There may also be annual fixed-amount account maintenance fees.
  • Unlike some other plans out there, in most cases, the beneficiary does not have legal rights to the funds in a 529 account. The donor stays in control of the money in the account.
  • Tax benefits vary among states and you’ll need to keep a close eye on how your location affects your potential tax savings. Most states require you to be funding an in-state plan while others offer income tax breaks for you regardless of whether or not you invest in a 529 sponsored by the state you live in.
  • There may be restrictions and guidelines for your investments in a 529 savings plan. Due to the current tax law, you can only make changes to investment options up to twice per year or when you change the account to a different beneficiary.
  • Students with prepaid tuition plans can only use those units or credits at colleges and universities that participate in the program.
  • The money held in a 529 account may affect a beneficiary’s eligibility to receive need-based financial aid for college.

State-by-State Breakdown

State Plan name Does this state offer a tax benefit for in-state contributors?
Alabama CollegeCounts 529 Plan Yes
Alaska University of Alaska College Savings Plan No (Alaska does not charge state income tax)
Arizona Arizona Family College Savings Program Yes, any state's plan
Arkansas Arkansas 529 plan Yes
California ScholarSave 529 No
Colorado Colorado CollegeInvest Yes
Connecticut Connecticut Higher Education Trust Yes
Delaware Delaware College Investment Plan No
District of Columbia D.C. College Savings Plan Yes
Florida Florida 529 Savings Plan No
Georgia Path2College 529 plan Yes
Hawaii HI529 No
Idaho IDeal (Idaho College Savings Plan) Yes
Illinois Bright Start Illinois College Savings Yes
Indiana CollegeChoice 529 Yes
Iowa College Savings Iowa 529 Plan Yes
Kansas Learning Quest Yes, any state's plan
Kentucky Kentucky Education Savings Plan Trust No
Louisiana Student Tuition Assistance and Revenue Trust Yes
Maine NextGen College Investing Plan No
Maryland Maryland College Investment Plan Yes
Massachusetts U.Fund College Investing Plan Yes
Michigan Michigan Education Savings Program Yes
Minnesota Minnesota College Savings Plan Yes, any state's plan
Mississippi Mississippi Affordable College Savings Yes
Missouri MOST 529 Yes, any state's plan
Montana Achieve Montana Yes, any state's plan
Nebraska Nebraska Educational Savings Trust Direct Plan Yes
Nevada Nevada College Savings Plans No
New Hampshire The Unique College Investing Plan No
New Jersey NJBEST 529 College Savings Plan No
New Mexico The Education Plan Yes
New York NY 529 Direct Plan Yes
North Carolina North Carolina's National College Savings Program No
North Dakota College SAVE Yes
Ohio Ohio 529 College Advantage Yes
Oklahoma Oklahoma College Savings Plan Yes
Oregon Oregon College Savings Plan Yes
Pennsylvania PA529 Yes, any state's plan
Rhode Island CollegeBound Saver Yes
South Carolina Future Scholar 529 Plan Yes
South Dakota CollegeAccess 529 No
Tennessee TNStars No
Texas Texas College Savings Plan No
Utah my529 Yes
Vermont Vermont Higher Education Investment Plan Yes
Virginia Virginia529 Yes
Washington DreamAhead College Investment Plan No
West Virginia Smart529 WV Direct Yes
Wisconsin Edvest College Savings Plan Yes
Wyoming N/A N/A, no state plan
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529 Savings Plans FAQ

Q: When is it too late to open a 529?

A: Many financial experts agree that, for the most part, it’s never too late to open a 529 before a student enters college. There are obvious advantages to starting earlier than later, but there are still benefits to be had for those who begin a 529 plan in high school.

Q: Do all states offer a prepaid tuition plan?

A: No, there are only 11 states that do. Be sure to check your state’s eligibility and if they’re accepting new applicants.

Q: What happens if I set up a plan and then I move?

A: You can open an account across state borders to take advantage of better income tax breaks. If you open an account and then move, you might not be eligible for the same level of state tax benefits as before.

Q: When should I stop contributing to a 529 plan?

A: Everyone’s case is different, but some good indicators that it’s time to stop contributing would be if you reached your investment goals, the beneficiary earns a full scholarship, there’s a drop in the family’s income, or there’s an older sibling who’s overfunded. The 529 money from the older sibling can be transferred to the younger beneficiary.

Q: Is there anything to worry about in terms of 529 fees?

A: Sometimes. Since all plans are state operated, you’ll find that the fees associated with each plan can vary. It’s important to know exactly what the terms of your agreement are. Investments with high management fees can greatly detract from your earnings in the long run.

Q: What do I need to know about 529s and the Coronavirus pandemic or similar situations?

A: If you’ve had classes cancelled because of the virus or other kind of emergency, you may be getting a tuition refund from your school. Those who paid their tuition fees with money withdrawn from a 529 plan could be put in a tricky situation. The IRS might be able to tax you on that money that was refunded to you since it is not being used for school expenses now. You should redistribute the refunded amounts back into your 529 plan. This needs to be done within 60 days of receiving the issued refund.

Expert Voice: Saving for College

Matt Hylland

Matt Hylland

Matt Hylland is a partner and financial planner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa, a fiduciary, fee-only investment advisor. Matt specializes in comprehensive, holistic financial planning that incorporates not only investments, but estate, tax, and education planning as well. Matt has been featured in The Wall Street Journal, CNBC, Kiplinger, and other nationally recognized finance publications.

2. Why do you recommend the 529 savings plan for your clients?

A lot of families have a goal to save for their child’s education. 529s are great accounts for families to set money aside that is separate from savings for other goals with the ability to be invested and grow over time. Many states have also made it convenient for other family members to be able to contribute to the plan as well as parents, so the whole extended family can all help contribute. Lastly, 529s are flexible in being able to be passed along to others if the assets are never used, or if not all of the savings are spent. This means that there are no tax implications for passing a 529 account between other children, or even nieces and nephews.

4. Any major cons of the 529? How can readers avoid this?

If 529 assets are not used for qualified education expenses, there is a 10% penalty for withdrawing the money. So, you can do some added damage to your financial plan by saving too aggressively into a 529 at the sacrifice of other goals, like retirement. Make sure you are adequately funding your other goals if you are saving in a 529.

In addition, if you are on the verge of qualifying for Federal financial aid through the FAFSA application, 529 accounts will count against you compared to assets in retirement accounts like Roth IRAs. Even for low income households, having a large 529 account could disqualify you from certain types of Federal aid.

5. Are there strategies that you recommend our readers pair with 529 plans? Such as other types of saving tips, plans, resources, or apps out there?

Even with 529 savings, it’s important to understand other tax credits and deductions available to households paying education expenses. Most households will not save enough in 529s to fully pay for college. So, the question becomes how to effectively use the 529 assets you have to pay for as much as possible, while also remaining eligible for valuable tax breaks like the American Opportunity Credit, the Lifetime Learning Credit, or deductions for tuition payments.