529 Plans
Plain English
A 529 plan is a savings account designed for education costs, where money can grow and — if used for qualified education expenses — potentially be withdrawn without paying tax on the growth.
What is it?
A 529 plan is a state-sponsored, tax-advantaged savings account for education expenses. Contributions grow tax-deferred, and withdrawals for qualified education expenses may be free of federal (and often state) tax on the growth, when applicable requirements are satisfied.
Why does it matter?
Compared to a taxable account, a 529 plan's tax treatment can meaningfully improve the after-tax value of college savings — see the Tax Buckets calculator for the general mechanics of how tax-advantaged growth compares to a taxable account.
How does it work?
Contributions are typically invested in age-based or static investment options offered by the specific state plan chosen (an account owner isn't restricted to their own state's plan). Non-qualified withdrawals of the growth portion are generally subject to tax plus a penalty.
Risks and limitations
Using funds for a non-qualified expense generally triggers tax and a penalty on the earnings portion. Investment options carry normal market risk — a 529 plan's tax treatment doesn't eliminate investment risk. Rules and qualified-expense definitions can change and vary somewhat by state.
Questions to ask a professional
What investment options does this specific state's 529 plan offer, and what are its fees? What counts as a 'qualified expense' under current rules? What happens if the beneficiary doesn't attend college?