Basics of 529 Plans

A 529 plan is a tax-advantaged savings plan designed to allow adults or children save for education expenses. 529 plans are named after Section 529 of the Internal Revenue Code which created these plans.

Yes, there are two types: prepaid tuition plans and investment plans. Prepaid tuition plans are designed to allow you to lock in tomorrow’s college tuition at today’s prices. Investment plans allow you to invest money that can be used for future college expenses such as tuition, fees, room and board, and books or up to $10,000 per beneficiary per account for K-12 tuition expenses. K-12 tuition expenses are not covered by prepaid tuition plans.

You can use a 529 plan account at nearly any accredited college or university in the country for undergraduate or graduate education. The money in your account may be used at any eligible educational institution in the country. This includes most public and private colleges and universities, graduate and postgraduate schools, community colleges, and certain technical and vocational schools. To find out if a particular school is an Eligible Institution, search for a school code at Up to $10,000 per year, per beneficiary can be used toward tuition at K-12 public, private or religious schools.*

The money in your account can also be used for apprenticeship programs registered with the U.S. Department of Labor or for the repayment of qualified education loans.

While distributions from 529 college savings plans for elementary or secondary education tuition expenses are federally and Maryland State tax-free, state tax treatment in other states will vary and could include state income taxes assessed, the recapture of taxes for previously subtracted amounts from state taxable income, and/or state-level penalties. You should consult with a tax or legal professional for additional information.

529 plans grow tax-deferred and any earnings are also federally tax-free when used toward qualified education expenses. Federal taxes and penalties may apply to distributions not used toward qualified education expenses.

Anyone can open a 529 plan for a beneficiary as long as the account holder is a U.S. citizen or resident alien, and the beneficiary has a valid social security number. Usually, account holders are parents of a child, but they can also be grandparents, an aunt or uncle, or anyone who would like to help fund another person’s education. Account holders can even include partnerships, corporations, trusts, estates or associations. You can also use a 529 college savings plan to save for your own educational expenses.

Yes, but you cannot have multiple beneficiaries or account holders on the same account.

Yes. Gift contributions to a 529 account are a great way to build up college savings.

You can use the funds in a 529 college savings plan to pay for qualified educational expenses such as tuition, fees, room and board, books, course-specific fees or supplies.

Prepaid tuition plans typically only cover tuition and have varying structures from state to state.

It is never too late if you consider any amount saved may reduce the amount you may need to borrow. Children and adults of any age may enroll in most 529 college savings plans. Prepaid tuition plans may have restrictions on how long you need to be in the plan before tuition benefits can be paid. Generally, 12th grade is the last year children can enroll in prepaid tuition plans.

You can still use your 529 college savings plan to pay tuition and fees not covered by the scholarship or grant, or you can apply your account toward other qualified educational expenses such as room and board, books, or course specific fees. Check with your prepaid plan to see how unused funds work.

Generally, you can also:

Transfer your account to another member of your beneficiary’s family (by blood or marriage).

Keep any unused funds in your account to pay for future education expenses, like graduate school.

Withdraw any unused funds up to the amount of the scholarship or grant without the 10% federal penalty, although income taxes on any earnings may apply.

Yes. You may transfer ownership to a new account holder unless the account has been funded with the proceeds from an UGMA/UTMA account. Any change of account holder must be requested in writing and include information as determined by the plans. Your right of control may not be sold, transferred, used as collateral, or pledged or exchanged for money or anything of value and you must agree to be bound by the terms and conditions of the plan.

Qualified education expenses are defined in the Internal Revenue Code. For a complete list, view IRS Publication 970. For the distributions to be federally tax-free, you have to use the funds for one of the qualified expenses below:

Colleges, Universities, Graduate Schools, and Technical/Vocational Schools:
Tuition and fees; room and board; books, supplies, and equipment required for enrollment or attendance; and computer and technology needs. Certain expenses for special needs students are covered.

K–12 Tuition for Public, Private, or Religious Schools*:
Tuition expenses of up to $10,000 per year, per beneficiary.

Apprenticeship Programs:
Books, fees, equipment, and other supplies.

Education Loan Repayment:
The principal or interest on a qualified education loan for the beneficiary. There is a $10,000 lifetime maximum per individual.

While distributions from 529 plans for elementary or secondary education tuition expenses are federally tax-free, state tax treatment will vary and could include state income taxes assessed, the recapture of taxes for previously subtracted amounts from state taxable income, and/or state-level penalties. You should consult with a tax professional for additional information.

Yes, you can make certain rollovers without incurring taxes or penalties, but they have to meet certain conditions. You must place the amount to be rolled over into an account of another 529 plan within 60 days after the date of the distribution. The new account must be for the same beneficiary, or for the benefit of a different beneficiary who is also a member of the family of the prior beneficiary. Visit the Investment Plan Rollovers page to learn more. Please consult your tax professional for tax implications specific to your situation.

Yes, 529 plans have estate tax benefits. Generally, the maximum annual gift tax exclusion amount is $18,000 per individual, per year (for 2024). However, with a 529 plan you can contribute up to $90,000 (or $180,000 for a married couple) to a beneficiary in one year and average the gift over five years without paying gift taxes, as long as no other gifts are made to the beneficiary during the five-year period. This may allow you to move assets into tax-deferred investments and out of your estate more quickly. Generally, assets in a 529 plan account are not included in the account holder’s estate, unless he or she elects the five-year averaging method and dies before the end of the fifth year.

Please consult a tax professional for more specific information, as estate tax issues can be complex.

Typically, a 529 plan does not require the child to attend college immediately after graduating high school. In general, if the child decides not to go to college, you may transfer the account to any relative of the child, or request a refund or non-qualified distribution from your account.

If you are the account holder and your child is the beneficiary of the 529 account and a dependent student, the money you have saved is typically considered a parental asset, not a student asset.

In that case, the family can expect the student’s need-based aid package to be reduced by up to 5.64% of the asset’s value. This means that if parents have saved $5,000 for college, the aid amount your student may be eligible for would be reduced by $280. Certain exclusions may also apply which could impact this amount.

If the asset is considered a student’s asset, a family can expect the student’s need-based aid package to be reduced by up to 20%.

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