529 plan.

In plain English

A 529 plan is a tax-advantaged education savings account named after the section of the IRS code that created it. Money grows tax-free, and withdrawals for qualified education expenses (tuition, room and board, books, fees, K-12 tuition up to $10,000 per year, and student loan repayment up to $10,000 lifetime) are tax-free at the federal level. Most states sponsor at least one 529 plan, and many offer a state income-tax deduction for contributions. Plans are owned by an adult (usually a parent or grandparent) with a child or other person named as beneficiary. State tax treatment varies; this entry is not advice on which plan to choose.

01Why it matters

For families saving for education, 529 plans beat regular brokerage accounts on the math any time growth is the goal: no annual tax drag, no tax at withdrawal if used properly. The catch is that funds withdrawn for non-qualified expenses face income tax plus a 10% penalty on the gains portion. New rules also allow up to $35,000 of unused 529 funds to roll into a Roth IRA for the beneficiary (subject to conditions), removing some of the historical commitment risk.

02The math, step by step

A parent contributes $300 a month to a 529 from a child's birth through age 18 in a target-date 529 portfolio averaging 6% returns. The account grows to roughly $115,000 by college, of which about $65,000 is contributions and $50,000 is tax-free growth. Skip the 529 and put the same money in a brokerage; the family owes capital gains tax on the $50,000.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.