An Intermediate Look at 529 Plans

By Jonathan Sparling

  • March 11, 2022
  • 4 min read


Father running outside with his toddler daughter

Updated January 2024 to reflect current gift tax limits

When it comes to saving for college, 529 plans are a great option. They offer excellent benefits and can be used for educational expenses apart from college.

If you visited the beginner’s look at 529 plans, you’re ready to cover the next level and expand what you know about 529s.


What is a 529 plan?

We’ll skip the full history, but basically 529 plans have been around for a while (in practice) and gained momentum in 1996 when state plans received federal tax relief thanks to Section 529 of the Internal Revenue Code.

Fast forward to today and 529 plans continue to provide families with tax advantages and other benefits while saving for college.

There are two types of 529s:

  • 529 savings plans
  • 529 prepaid tuition plans


What is a 529 savings plan?

If you’re familiar with how Roth IRAs work, you already know something about 529 savings plans. They work similarly.

Contributions to your 529 are made with after-tax dollars, and upon opening an account, you choose an investment option — just like a Roth IRA. Over time, your 529 savings grow tax-deferred, and withdrawals are tax-free if you use the money for qualified education expenses.


What is a 529 prepaid tuition plan?

The name says it all. 529 prepaid tuition plans let you purchase tuition (as credits or units) at today’s tuition rates for the colleges in the plan — primarily in-state public schools. Unlike 529 savings plans, prepaids are designed to help protect you against rising tuition costs without much market risk.

While states run most prepaid plans, there is one owned by colleges, and that’s Private College 529 Plan. Tuition purchased from Private College 529 can be used at any of our nearly 300 member colleges nationwide, meaning there are no residency requirements to enroll.


What are the primary benefits of 529 plans?

The big deal with 529 plans is the tax savings. Plain and simple. Revisit “What is a 529 savings plan?” for all the great tax advantages that come with opening, saving in, and withdrawing from your account.

We like to say: Come for the tax savings, stay for all the other benefits too.

  • Big contribution limits: You can contribute up to $18,000 per year for each beneficiary without incurring a gift tax penalty (or $36,000 for joint filers).
  • Unphased: Some college savings options have income phaseouts, but 529s don’t. You’ll never make too much or too little to enroll and save.
  • Switcheroo: You can change the beneficiary on your account to another eligible family member anytime — because life happens, and people’s plans change.
  • So much more: Your money in a 529 savings plan can also be used for things other than college, like K-12 education expenses (up to $10,000 per student), student loan repayment ($10,000 lifetime limit), and approved apprenticeship programs.

Learn about the benefits of Private College 529 Plan >>


What states offer 529 plans?

Every state except Wyoming offers a 529 savings plan, and so does the District of Columbia. These plans share a lot in common but can differ on things like investment options, structure, and fees. While you don’t have to open a 529 plan where you live, you may miss out on some tax advantages in your state if you don’t.

When it comes to prepaid tuition plans, there are fewer options. Not every state has one, and only nine states are accepting new enrollments. Of the nine, some have residency requirements, and their member colleges are only located in the state.

If you’re looking to try someplace new, consider plans like Private College 529. We have no residency requirements to open an account, and our member colleges are in 37 states and D.C.


Am I limited to only one 529 plan?

You are not limited to one 529 plan or even one type of plan. Many people open a 529 savings plan and a prepaid plan together. Here’s why:

  • Safeguard your savings: Investing your money in the market can return big gains, but it can also leave you vulnerable. That’s why people diversify their college savings — splitting money between a 529 savings plan, where you play the market, and a 529 prepaid tuition plan that’s more protected.
  • Cover all costs: Why not take advantage of both plans? Save on the cost of tuition in a prepaid plan and close the gap on remaining college costs with a 529 savings plan.


How do I enroll in a 529 plan?

The most important thing to do is choose the best college savings option for you. There’s a lot to consider and other options aside from 529 plans. Make sure you compare them all before moving forward.

See a comparison of different savings options >>

If and when you settle on a 529, weigh all the benefits outlined here. Do you want to open a 529 savings account, prepaid account, or both? Many families start with their state’s 529 plan. Enrollment is easy, and the minimum balance to open an account is small.

*Earnings in 529 plans are not subject to federal tax and, in most cases, not subject to state tax if withdrawals are used for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it for an eligible college expense, it will generally be subject to a 10% federal tax penalty on earnings in the account.

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