07/23/2024
Options include prepaid tuition plans and education savings plans to help families cover educational expenses.
The SECURE Act of 2019 and SECURE Act 2.0 of 2022 expanded the reach of how families can use 529 plans.
If you’re thinking of helping your children or grandchildren with education expenses, a 529 plan may be an option worth considering.
These plans are sponsored by states or educational institutions. They let you set up an investment account to pre-pay tuition costs at eligible colleges and universities, or make after-tax contributions to cover tuition for an elementary or secondary public, private or religious school. These investment accounts are designed specifically for the qualified educational expenses of the named beneficiary—usually a child with anticipated future educational costs.
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Prepaid tuition plans: Most of these plans are sponsored by state governments and require state residency for eligibility. When you open a pre-paid 529 plan, in most cases the money you contribute is converted to units or credits to be used in the future at participating colleges and universities. The credits may be used to cover tuition costs and—in some cases—room and board.
Education saving plans: Money contributed to these state-sponsored plans is not deductible from your current federal taxable income, but earnings within the plan are tax-deferred and may be tax-free when withdrawn if that money is used to cover eligible higher education costs. Many states also offer state income tax benefits, matching grants or other benefits when you invest in one of these plans from your state of residence.
Those who invest in a 529 plan typically have the option to invest in their choice of several investment portfolios offered by the plan and are permitted to change their investment option twice per year (investments in education savings plans that invest in mutual funds and similar investments are not guaranteed by state governments and are not federally insured).
Be aware that regardless of whether you establish a prepaid tuition plan or an education savings plan, it may impact eligibility for financial aid, depending on who is the owner of the 529 plan. Financial aid rules change frequently, and schools can set their own rules for their own scholarships, so it’s important to continue to monitor the guidelines.
The following chart outlines some of the major differences between prepaid tuition plans and education savings plans:
Prepaid tuition plan
Educational savings plan
Most plans sponsored by state governments and have residency requirements for saver and/or beneficiary.
Sponsored by state governments. Some states have residency requirements for the saver and/or beneficiary.
Purchase units or credits for beneficiary to use in the future at participating colleges and universities.
Use an investment account to pay for the beneficiary’s future college or university educational expenses.
Participating higher educational institutions are usually public and located in the state hosting the plan. Beneficiaries can use for other schools, but amount is determined by the plan.
Use $10,000 annually to pay tuition for any elementary or secondary school; expenses required for registered apprenticeship programs and education loan repayments per beneficiary.
Use to cover tuition and mandatory fees.
May use for tuition, room and board and mandatory fees.
Some state governments guarantee money paid into the prepaid tuition plans. They are not guaranteed by the federal government.
Investments are not guaranteed by state governments. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.
Plans are typically offered with mutual fund, exchange-traded fund (ETF) investments as well as bank products.
While prepaid tuition plans are restricted for use with costs specific to the colleges or universities that sponsor the plans or in the states that sponsor the plans, withdrawals from education savings plans can generally be used at any eligible college or university. Education savings plans may also be used to cover the cost of the purchase of most computer technology or related equipment and services, such as Wi-Fi access for college expenses only. However, if you withdraw money from an education savings plan and do not use it on an eligible college expense, you will typically be subject to income tax and an additional 10% federal tax penalty on any earnings. The distribution may also be subject to state tax, depending on your state of residence.
Additional changes were made to the plans after Congress passed both the SECURE Act, which was signed on Dec. 20, 2019, and the SECURE Act 2.0, signed Dec. 23, 2022.
Under SECURE Act plan holders can now:
Under SECURE Act 2.0 plan holders can now:
Anyone may set up a 529 plan and name whomever they wish as the beneficiary—a relative, a friend or even yourself. There are no income restrictions for the contributor or the beneficiary.
Total contributions may not exceed an aggregate amount that is set by each state. Contributions to the plan are also considered “gifts” for federal income tax purposes. Although the amount that you can give to any one person is $18,000 in 2024, you’re allowed to pre-pay up to five years’ worth of gifts to a 529 plan, or $90,000 in 2024 without incurring the federal gift tax, per individual donor.
If all the money in the 529 plan is not used, you have the option to change the beneficiary to another member of the family2 with no tax consequences. Once a year, you can roll the assets into another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family.
If you’re interested in 529 plans for your children or grandchildren, the Securities and Exchange Commission website has more information. If you’d like help with your research, you may want to talk with a financial professional. If you’re curious about other educational savings options, make sure to check out our Coverdell Education Savings Accounts (CESAs) or Uniform Transfers to Minors Act accounts (UTMAs), which you can conveniently open online.
1 “Updated Investor Bulletin: An Introduction to 529 Plans.” U.S. Securities and Exchange Commission. 2023.
2 Qualified family members include the designated beneficiary’s spouse, son or daughter, or a descendant of the beneficiary’s son or daughter; the beneficiary’s stepson or stepdaughter, brother, sister, stepbrother or stepsister, father or mother, or ancestor of either parent, stepfather or stepmother, niece or nephew, or aunt or uncle—as well as the spouse of any of those individuals, including the beneficiary’s son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.
The information provided is not intended as a source for tax, legal or accounting advice. Please consult with a legal and/or tax professional for specific information regarding your individual situation.
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