Guide · Savings & Investing
529 Plans Explained: Saving for College the Tax-Smart Way
College costs have outpaced general inflation for decades. A 529 plan's tax-free growth is one of the few tools that can keep pace — if you start early enough.
Why college cost inflation matters
Treating today's tuition as your savings target understates what you'll actually need. At 5% annual cost inflation, a $28,000-a-year college today costs roughly $46,000 a year in 13 years — and that's before the multi-year compounding across all 4 years of enrollment.
| Years From Now | Annual Cost |
|---|---|
| 0 (today) | $28,000 |
| 10 years | $45,600 |
| 13 years | $52,800 |
Contribution limits
There's no federal cap on 529 contributions, but amounts above the annual gift tax exclusion count against your lifetime gift/estate tax exemption. Most states also cap the total balance per beneficiary, typically $300,000–$550,000.
Frequently asked questions
Do I have to use a 529 plan from my own state?
No — you can open a 529 in almost any state regardless of where you live, but some states offer a state income tax deduction or credit only for contributions to their own plan. Compare your home state's tax benefit against other states' investment options and fees.
What expenses qualify for tax-free 529 withdrawals?
Tuition, fees, room and board (if enrolled at least half-time), books, supplies, and required equipment at any accredited college, university, or vocational school. Up to $10,000/year can also go toward K-12 tuition, and some student loan repayment is allowed (lifetime limit applies).
What's the penalty for non-qualified withdrawals?
The earnings portion (not your original contributions) is taxed as ordinary income plus a 10% federal penalty. Some exceptions apply, including scholarships received and the new Roth IRA rollover option.
How does the 529-to-Roth IRA rollover work?
Since 2024, you can roll over up to $35,000 (lifetime) from a 529 account open at least 15 years into the beneficiary's Roth IRA, subject to annual Roth contribution limits and the beneficiary having earned income. It's a useful safety valve if a child doesn't use all the funds.