529 Plan

There are two types of 529 plans: education savings plans and prepaid tuition plans. All 50 states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.

Education savings plans let a saver open an investment account to save for the beneficiary's future qualified higher education expenses. A saver may typically choose among a range of investment options, which often include various mutual fund and exchange-traded fund investments and a principal-protected bank product. All education savings plans are sponsored by state governments, but only a few have residency requirements for the saver and/or beneficiary. State governments do not guarantee investments in education savings plans. Education savings plan investments in mutual funds and exchange-traded funds are not federally guaranteed, but investments in some principal-protected bank products may be insured by the Federal Deposit Insurance Corporation, known as the FDIC.

Prepaid tuition plans let a saver or account holder purchase units or credits for the beneficiary to use in the future at participating colleges and universities. Most prepaid tuition plans are sponsored by state governments and have residency requirements for the saver and/or beneficiary. One exception is a prepaid tuition plan sponsored by a group of private colleges and universities. Prepaid plans are not guaranteed by the federal government. Some state governments guarantee the money paid into the prepaid tuition plans that they sponsor, but some do not.

The Account Holder and the Beneficiary

The descriptions below come from the 529 bulletin, the MSRB's Investor's Guide to 529 Savings Plans, called the MSRB guide in this entry, and Section 529 of the Internal Revenue Code.

The person who opens the 529 plan account is called the account holder or the saver. The person the account is opened for is called the beneficiary or the student. The account holder and the beneficiary can be the same person. The MSRB guide uses the term account owner. Only the account owner may make a withdrawal from a 529 savings plan account. Anyone may make a contribution to a 529 savings plan account. The program manager, on behalf of the state sponsor, may make changes to the plan.

Section 529(e)(1)(A) defines a designated beneficiary as the individual designated at the commencement of participation in the qualified tuition program as the beneficiary of amounts paid (or to be paid) to the program. Section 529(e)(1)(B) defines a designated beneficiary, in the case of a change in beneficiaries described in subsection (c)(3)(C), as the individual who is the new beneficiary.

What Section 529 Requires of a Qualified Tuition Program

Section 529(a) provides that a qualified tuition program shall be exempt from taxation under subtitle A of the Internal Revenue Code. Notwithstanding that provision, such a program shall be subject to the taxes imposed by section 511, relating to imposition of tax on unrelated business income of charitable organizations.

Section 529(b)(1) defines the term qualified tuition program as a program established and maintained by a State or agency or instrumentality thereof or by 1 or more eligible educational institutions. Paragraph (b)(1)(A)(i) covers a program under which a person may purchase tuition credits or certificates on behalf of a designated beneficiary which entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary. In the case of a program established and maintained by a State or agency or instrumentality thereof, paragraph (b)(1)(A)(ii) covers a program under which a person may make contributions to an account which is established for the purpose of meeting the qualified higher education expenses of the designated beneficiary of the account. Paragraph (b)(1)(B) covers a program which meets the other requirements of subsection (b).

Section 529(b)(2) provides that a program shall not be treated as a qualified tuition program unless it provides that purchases or contributions may only be made in cash. Section 529(b)(3) provides that a program shall not be treated as a qualified tuition program unless it provides separate accounting for each designated beneficiary.

Section 529(b)(4) provides that a program shall not be treated as a qualified tuition program unless it provides that any contributor to, or designated beneficiary under, the program may, directly or indirectly, direct the investment of any contributions to the program, or any earnings thereon, no more than 2 times in any calendar year. Section 529(b)(5) provides that a program shall not be treated as a qualified tuition program if it allows any interest in the program or any portion thereof to be used as security for a loan.

Section 529(b)(6) provides that a program shall not be treated as a qualified tuition program unless it provides adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess of those necessary to provide for the qualified higher education expenses of the beneficiary.

Qualified Expenses

The definitions below come from Section 529 of the Internal Revenue Code and the 529 bulletin.

Section 529(e)(3)(A) defines the term qualified higher education expenses as tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance; and expenses for the purchase of computer or peripheral equipment, computer software, or Internet access and related services, if such equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution.

Section 529(e)(3)(B) provides that, in the case of an individual who is an eligible student for any academic period, the term also includes reasonable costs for the period, as determined under the qualified tuition program, incurred by the designated beneficiary for room and board while attending the institution.

Section 529(e)(5) defines an eligible educational institution as an institution which is described in section 481 of the Higher Education Act of 1965, as in effect on the date of the enactment of paragraph (e)(5), and which is eligible to participate in a program under title IV of that Act.

Section 529(c)(7) provides that any reference in section 529 to the term qualified higher education expense shall include a reference to certain expenses in connection with enrollment or attendance at, or for students enrolled at or attending, an elementary or secondary public, private, or religious school. 

Those expenses are tuition; curriculum and curricular materials; books or other instructional materials; online educational materials; tuition for tutoring or educational classes outside of the home, including at a tutoring facility, but only if the tutor or instructor is not related to the student and is licensed as a teacher in any State, has taught at an eligible educational institution, or is a subject matter expert in the relevant subject; fees for a nationally standardized norm-referenced achievement test, an advanced placement examination, or any examinations related to college or university admission; fees for dual enrollment in an institution of higher education; and educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies. The concluding provision of section 529(e)(3)(A) provides that the amount of cash distributions from all qualified tuition programs described in subsection (b)(1)(A)(ii) with respect to a beneficiary during any taxable year shall, in the aggregate, include not more than twenty thousand dollars in expenses described in subsection (c)(7) incurred during the taxable year.

Section 529(c)(8) provides that any reference in subsection (c) to the term qualified higher education expense shall include a reference to expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.

Section 529(c)(9)(A) provides that any reference in subsection (c) to the term qualified higher education expense shall include a reference to amounts paid as principal or interest on any qualified education loan of the designated beneficiary or a sibling of the designated beneficiary. Section 529(c)(9)(B) provides that the amount of distributions treated as a qualified higher education expense under that paragraph with respect to the loans of any individual shall not exceed ten thousand dollars, reduced by the amount of distributions so treated for all prior taxable years. Under section 529(c)(9)(C), amounts treated as a qualified higher education expense with respect to the loans of a sibling of the designated beneficiary shall be taken into account with respect to the sibling and not with respect to the designated beneficiary, and the term sibling means an individual who bears a relationship to the designated beneficiary which is described in section 152(d)(2)(B).

The 529 bulletin describes the same categories. Qualified higher education expenses include tuition and certain expenses for post-secondary education and recognized post-secondary credential programs. Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at non-U.S. colleges and universities, or at a recognized post-secondary credential program. Education savings plans can also be used to pay for other education-related expenses. These include up to twenty thousand dollars per year per beneficiary for tuition and certain expenses at any public, private, or religious elementary or secondary school; certain expenses required for participation in registered apprenticeship programs; and qualified education loan repayments up to ten thousand dollars total per beneficiary.

Contributions and the Gift Tax

The rules below come from Section 529 of the Internal Revenue Code, the Internal Revenue Service's questions and answers on 529 plans, and the 529 bulletin.

Contributions to a 529 plan are not deductible. Section 529(c)(2)(A) provides that any contribution to a qualified tuition program on behalf of any designated beneficiary shall be treated as a completed gift to the beneficiary which is not a future interest in property, and shall not be treated as a qualified transfer under section 2503(e).

Section 529(c)(2)(B) provides that if the aggregate amount of contributions described in subparagraph (A) during the calendar year by a donor exceeds the limitation for that year under section 2503(b), the aggregate amount shall, at the election of the donor, be taken into account for purposes of section 2503(b) ratably over the 5-year period beginning with that calendar year.

Many states offer tax benefits for contributions to a 529 plan. These benefits may include deducting contributions from state income tax or matching grants but may come with various restrictions or requirements. In addition, a saver may only be eligible for these benefits if the saver invests in a 529 plan sponsored by the saver's state of residence.

Tax Treatment

The statements below come from Section 529 of the Internal Revenue Code, the Internal Revenue Service's questions and answers on 529 plans, last reviewed January 30, 2026, the Internal Revenue Service's tax topic on qualified tuition programs, and the 529 bulletin.

Earnings accumulate tax free while in the account. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board at an eligible education institution and tuition at elementary or secondary schools. If 529 account withdrawals are used for qualified higher education expenses or the other expenses discussed above, earnings in the 529 account are not subject to federal income tax and, in many cases, state income tax. If 529 account withdrawals are not used for these expenses, they will be subject to state and federal income taxes and an additional 10 percent federal tax penalty on earnings. One of the benefits of 529 plans is the tax-free earnings that grow over a period of time. A saver will lose some of these potential benefits if the saver withdraws money from a 529 plan account within a short period of time after it is contributed.

Section 529(c)(3)(A) provides that any distribution under a qualified tuition program shall be includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of the chapter. Section 529(c)(3)(B)(i), on in-kind distributions, provides that no amount shall be includible in gross income under subparagraph (A) by reason of a distribution which consists of providing a benefit to the distributee which, if paid for by the distributee, would constitute payment of a qualified higher education expense. Section 529(c)(3)(B)(ii), on cash distributions, provides that in the case of distributions not described in clause (i), if such distributions do not exceed the qualified higher education expenses (reduced by expenses described in clause (i)), no amount shall be includible in gross income, and in any other case the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions.

Section 529(c)(6) provides that the tax imposed by section 530(d)(4) shall apply to any payment or distribution from a qualified tuition program in the same manner as such tax applies to a payment or distribution from a Coverdell education savings account.

Rollovers and Changes of Beneficiary

The rules below come from Section 529 of the Internal Revenue Code and the 529 bulletin.

Section 529(c)(3)(C)(i) provides that subparagraph (A) shall not apply to that portion of any distribution which, within 60 days of the distribution, is transferred to another qualified tuition program for the benefit of the designated beneficiary; to the credit of another designated beneficiary under a qualified tuition program who is a member of the family of the designated beneficiary with respect to which the distribution was made; or to an ABLE account, as defined in section 529A(e)(6), of the designated beneficiary or a member of the family of the designated beneficiary. Section 529(c)(3)(C)(ii) provides that any change in the designated beneficiary of an interest in a qualified tuition program shall not be treated as a distribution for purposes of subparagraph (A) if the new beneficiary is a member of the family of the old beneficiary. Section 529(c)(3)(C)(iii) provides that clause (i)(I) shall not apply to any transfer if such transfer occurs within 12 months from the date of a previous transfer to any qualified tuition program for the benefit of the designated beneficiary.

Section 529(e)(2) defines a member of the family, with respect to any designated beneficiary, as the spouse of the beneficiary; an individual who bears a relationship to the beneficiary which is described in subparagraphs (A) through (G) of section 152(d)(2); the spouse of any individual described in the preceding clause; and any first cousin of the beneficiary.

Section 529(c)(3)(E)(i) provides that in the case of a distribution from a qualified tuition program of a designated beneficiary which has been maintained for the 15-year period ending on the date of the distribution, subparagraph (A) shall not apply to so much of the portion of the distribution which does not exceed the aggregate amount contributed to the program, and earnings attributable thereto, before the 5-year period ending on the date of the distribution, and which is paid in a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of the designated beneficiary. Section 529(c)(3)(E)(ii) provides that the rule applies only to the extent that the distribution does not exceed the amount applicable to the designated beneficiary under section 408A(c)(2) for the taxable year, reduced by the aggregate contributions made during the taxable year to all individual retirement plans maintained for the benefit of the designated beneficiary, and that it does not apply to the extent that the aggregate amount of such distributions with respect to the designated beneficiary for the taxable year and all prior taxable years exceeds thirty-five thousand dollars.

The 529 bulletin describes the same Roth IRA rollover. The rollover is available for the same beneficiary, the total rollover amount is limited to thirty-five thousand dollars, annual Roth IRA contribution limits apply, the 529 account has to have been open for at least 15 years, and the funds rolled over must have been in the 529 account for at least five years.

Fees, Restrictions and Financial Aid

The statements below come from the 529 bulletin.

Fees and expenses associated with 529 plans lower returns. Fees and expenses will vary based on the type of 529 plan (education savings plan or prepaid tuition plan), whether it is a broker- or direct-sold plan, the plan itself and the underlying investments. A saver should carefully review the plan's offering circular to understand what fees are charged for the plan and each investment option. Education savings plans may charge an enrollment/application fee, annual account maintenance fees, ongoing program management fees, and ongoing asset management fees. The asset management fees will depend on the investment option the saver selects. Prepaid tuition plans may charge an enrollment/application fee and ongoing administrative fees.

Education savings plans have certain pre-set investment options. It is not permitted to switch freely among the options. Under current tax law, an account holder is only permitted to change his or her investment option twice per year or when there is a change in the beneficiary. With limited exceptions, an account holder can only withdraw money that the account holder invests in an education savings plan without incurring taxes and penalties for qualified higher education expenses or the other expenses discussed above.

Beneficiaries of prepaid tuition plans may only use their purchased credits or units at participating colleges or universities. If a beneficiary doesn't attend a participating college or university, the prepaid tuition plan may pay less than if the beneficiary attended a participating college or university. It may only pay a small return on the original investment, depending on how the plan calculates the return.

While different educational institutions treat assets held in a 529 account differently, investing in a 529 plan will generally impact a student's eligibility to receive need-based financial aid for college.

More information about a particular 529 plan is available by reading its offering circular. Additional information about a mutual fund or exchange-traded fund that is an investment option in an education savings plan is available in its prospectus, statement of additional information, and semiannual and annual shareholder reports. These documents can be obtained from the plan manager for no charge.

Direct-Sold and Broker-Sold Plans

The statements below come from the 529 bulletin and the MSRB's page on tax and legal considerations for 529 plans.

Investors that purchase an education savings plan from a broker are typically subject to additional fees, such as sales loads or charges at the time of investment or redemption and ongoing distribution fees. Municipal securities dealers that market 529 savings plans must comply with MSRB rules. MSRB rules establish basic protections for customers purchasing dealer-sold 529 savings plans.

How 529 Plans Are Regulated

The statements below come from the Investor.gov glossary entry for 529 plans, the MSRB's page on tax and legal considerations for 529 plans, and the MSRB rules named.

The Securities and Exchange Commission, known as the SEC, does not regulate or oversee 529 plans. Although most 529 savings plans have been modeled after mutual funds or funds of funds, these plans are considered municipal fund securities because they are municipal securities issued by a state or state-authorized agency. The role of the state in issuing the plans means 529 savings plans are not subject to regulation under federal securities laws. In particular, in structuring a 529 savings plan, the state or agency is not required to meet the basic requirements set forth in the Investment Company Act, including, among other things, registration with the SEC, preparation of a prospectus and statement of additional information, daily calculation of net asset value, and establishment of a board of directors that includes independent directors. While the plans may be subject to these exemptions from federal securities laws, municipal securities dealers that market 529 savings plans must comply with MSRB rules.

MSRB Rule D-12 provides that the term municipal fund security shall mean a municipal security issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940, would constitute an investment company within the meaning of Section 3 of the Investment Company Act of 1940.

MSRB Rule G-17, titled Conduct of Municipal Securities and Municipal Advisory Activities, provides that in the conduct of its municipal securities or municipal advisory activities, each broker, dealer, municipal securities dealer, and municipal advisor shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.

MSRB Rule G-30, titled Prices and Commissions, provides in paragraph (a) that no broker, dealer or municipal securities dealer shall purchase municipal securities for its own account from a customer, or sell municipal securities for its own account to a customer, except at an aggregate price, including any mark-up or mark-down, that is fair and reasonable. Paragraph (b)(i) provides that each broker, dealer and municipal securities dealer, when executing a transaction in municipal securities for or on behalf of a customer as agent, shall make a reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions. Paragraph (b)(ii) provides that no broker, dealer or municipal securities dealer shall purchase or sell municipal securities as agent for a customer for a commission or service charge in excess of a fair and reasonable amount.

MSRB Rule G-45, titled Reporting of Information on Municipal Fund Securities, provides in paragraph (a) that each underwriter of a primary offering of municipal fund securities that are not interests in local government investment pools shall report to the Board the information relating to such offering required by Form G-45 by no later than 60 days following the end of each semi-annual reporting period ending on June 30 and December 31 and in the manner prescribed in the Form G-45 procedures below and as set forth in the Form G-45 Manual; provided, however, that performance data shall be reported annually by no later than 60 days following the end of the reporting period ending on December 31.

529 Plans in FINRA's Examination Outline

The content outline for the Securities Industry Essentials examination from the Financial Industry Regulatory Authority, known as FINRA, carries a 2025 copyright. Section 2 of the outline, Understanding Products and Their Risks, includes topic 2.1.5, Municipal Fund Securities. The topic lists 529 plans, prepaid tuition and savings plans under 529 plans, local government investment pools, and ABLE accounts, and lists knowledge of municipal fund securities, owner versus beneficiary, restricted use of plan assets, tax advantages, and direct or adviser sold. The Section 2 rules list for the MSRB includes Rule D-12, titled Definition of Municipal Fund Securities; Rule G-17, titled Conduct of Municipal Securities and Municipal Advisory Activities; Rule G-30, titled Pricing and Commissions; and Rule G-45, titled Reporting of Information on Municipal Fund Securities. Candidates should check the current outline before the examination.

Common Misunderstandings

The corrections below come from Section 529 of the Internal Revenue Code, the Internal Revenue Service, Investor.gov, the MSRB and the MSRB rules named.

A 529 plan is not a single kind of product. There are two types of 529 plans: education savings plans and prepaid tuition plans.

Contributions to a 529 plan are not deductible. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary. Many states offer tax benefits for contributions to a 529 plan.

Not every withdrawal is free of tax. If 529 account withdrawals are not used for qualified higher education expenses or the other expenses the 529 bulletin discusses, they will be subject to state and federal income taxes and an additional 10 percent federal tax penalty on earnings.

Qualified expenses are not limited to college costs. Section 529(c)(7), (c)(8) and (c)(9) add elementary and secondary school expenses, apprenticeship expenses and qualified education loan repayments, with the dollar limits stated in section 529(e)(3)(A) and section 529(c)(9)(B).

The account holder and the beneficiary are not always different people. The account holder and the beneficiary can be the same person.

A contribution is a gift. Section 529(c)(2)(A) provides that any contribution to a qualified tuition program on behalf of any designated beneficiary shall be treated as a completed gift to the beneficiary which is not a future interest in property.

The investments in an education savings plan are not guaranteed. State governments do not guarantee investments in education savings plans, and investments in mutual funds and exchange-traded funds in those plans are not federally guaranteed. Prepaid plans are not guaranteed by the federal government.

An account holder cannot switch freely among investment options. Section 529(b)(4) provides that a contributor or designated beneficiary may direct the investment of contributions, or any earnings thereon, no more than 2 times in any calendar year, and an account holder is only permitted to change his or her investment option twice per year or when there is a change in the beneficiary.

A 529 plan is not registered with the SEC the way a mutual fund is. In structuring a 529 savings plan, the state or agency is not required to meet the basic requirements set forth in the Investment Company Act, including registration with the SEC.

Prepaid tuition units are not usable at every school. Beneficiaries of prepaid tuition plans may only use their purchased credits or units at participating colleges or universities, and the plan may pay less if the beneficiary does not attend a participating college or university.

A 529 account does not leave financial aid eligibility unaffected. Investing in a 529 plan will generally impact a student's eligibility to receive need-based financial aid for college.

Key Points

Section 529(b)(1) defines a qualified tuition program as a program established and maintained by a State or agency or instrumentality thereof or by 1 or more eligible educational institutions, under which a person may purchase tuition credits or certificates, or may make contributions to an account for the qualified higher education expenses of the designated beneficiary.

There are two types of 529 plans: education savings plans and prepaid tuition plans.

Contributions to a 529 plan are not deductible, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary.

Section 529(b)(2) requires that purchases or contributions may only be made in cash, and section 529(b)(4) provides that a contributor or designated beneficiary may direct the investment of contributions, or any earnings thereon, no more than 2 times in any calendar year.

529 savings plans are considered municipal fund securities, and MSRB Rule D-12 defines a municipal fund security.

The content outline for the Securities Industry Essentials examination lists 529 plans under topic 2.1.5, Municipal Fund Securities, and lists MSRB Rules D-12, G-17, G-30 and G-45 in the Section 2 rules list.