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What Are the 529 Plan Rules?

By Gabriel Jimenez-Ekman

Gabriel Jimenez-Ekman is a content editor and writer at Scholarships360. He has managed communications and written content for a diverse array of organizations, including a farmer’s market, a concert venue, a student farm, an environmental NGO, and a PR agency. Gabriel graduated from Kenyon College with a degree in sociology.

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Updated: April 29th, 2022
What Are the 529 Plan Rules?

Before you start depositing your money into a 529 Plan, it’s important to sharpen your understanding of their rules. 529 Plans have a specific set of rules for everything, including how their funds can be used and deposited. In this article, we’ll answer all your questions about 529 Plans. Read on to learn all about one of the most useful tools to maximize your college savings.

Also see: Scholarships360’s free scholarship search tool

529 Plans explained

A 529 Plan is a type of savings plan that students, their family, and family friends can use to help save for college. The 529 Plan has special tax advantages. Withdrawals used to pay for educational expenses are not subject to federal, and usually state, taxes. This means that your investment can grow over time without being taxed. If you are saving for college for yourself or for someone else, 529 Plans are typically the best way to do it. Their benefits are magnified the earlier you start saving; you’ll earn interest on interest as they continue to grow.

What you can pay for with 529 Plan funds

529 Plans can only be used to pay for approved educational expenses. These include tuition and fees, books and other class supplies, room and board, and internet. Students are only eligible to use 529 Plans for room and board if they are enrolled at least half-time. Computers and special needs equipment are also eligible for 529 Plan funding if they are related to your education. These funds can be used at any federally approved program. This can include 4-year or 2-year undergraduate programs, trade school, graduate school, and other programs.

Learn more: Does a 529 Plan impact financial aid?

529 Plan tax exemptions

In most states, 529 Plan contributions can be claimed as state income tax deductions. Your state government will return all the state taxes paid on that income at the end of the year.

Contributions are not exempt from federal taxes, but their earnings are. This means that as your investment grows, it will not be subject to taxes on that growth. These benefits are magnified as they grow over time.

Also see: How much is the 529 plan tax deduction worth?

529 Plan contribution limits

Each state sets its own limit for the total sum of money you can have in a 529 Plan account. These limits should reflect the total cost of a higher education in that state, including an undergraduate and graduate degree. These costs include tuition, room and board, books, and other fees. Typically the limit is over $250,000.

You can contribute as much money annually as you’d like, but only a certain amount is eligible for state tax breaks. These limits vary by state. Many range between $2,000 and $4,000 per year. This is a good incentive to begin contributing early to maximize your tax breaks.

For more details: How much can you contribute to a 529 Plan?

Who sponsors 529 Plans?

States sponsor 529 Plans, but you are allowed to choose a 529 Plan from any state that you’d like. Most people choose a plan in the state in which they reside. Typically, states offer income tax deductions for residents of their state. However, if your state doesn’t offer any tax benefits, it’s a good idea to shop around to find the right fit.

Read more: How to choose the best 529 Plan for you

Additional resources

If you’re a parent looking to plan for your child’s educational future, you’re in the right place. We have resources to help you and your child through every step of the application process. You can start off with our guide to how much to save for college. This includes information on savings vehicles, as well as when you should start saving, and more. You can also encourage your child to start applying for scholarships – regardless of their age, we have opportunities for them! That includes middle school scholarships and high school full ride scholarships, as well as our free scholarship search tool for all ages.

Remember, aside from saving money for college, it’s also important to set your student on the right educational path now so that they have the best options when it comes time to apply. Our comparison of private vs public schools can help you make an educated decision as to where you send your child. Once they’re in high school, it’s important to ensure that they are on a good track to create a good impression on admissions officers. Our high school checklist and guides to internships and extracurricular activities can help you keep your finger on the pulse. You can also check out our guide to GPAs to get an idea of what GPA you want to shoot for. Good luck and make sure to check back as you move through the admissions process!

Frequently asked questions

Can I pay for a school health insurance plan with 529 Plan funds?

No – health insurance plans are not considered qualified expenses. 

Are 529 Plans transferable?

Yes – you can change the beneficiary of your 529 Plan at any time. If you start an account for your child who doesn’t end up going to college, you can use that money to pay for their sibling’s education instead.

Can I pay for college application fees with a 529 Plan?

No – expenses related to the college application process are not considered qualified expenses.

Who owns the funds in a 529 Plan?

The owner of the account is the person who is depositing funds. The account does not shift ownership when the beneficiary turns 18. 

Can I pay off student loans with a 529 Plan?

Yes – if you have money left over in your 529 Plan, you can use it to pay off student loans that you may have taken out. However, you can only use up to $10,000 of your 529 Plan to go towards student loans. If possible, you’d be better off using your 529 Plan to pay your tuition up-front to avoid taking out loans in the first place.

What happens to the funds if the account beneficiary doesn’t attend college?

If the account beneficiary doesn’t attend college, you can change the beneficiary to another family member, or you can withdraw the funds from the account and use them for whatever you want. However, if you withdraw the funds from the account, you will incur a 10% charge on top of the income tax that you had deducted.

Can I pay for an apprenticeship with a 529 Plan?

Yes – In December 2019, the Secure Act mandated that 529 Plans can be used to pay for apprenticeships.

Do I qualify for a 529 Plan?

Yes – everyone is eligible to start a 529 Plan, regardless of your income, your assets, or the state you live in.

Can I use 529 Plan funds to pay for elementary or secondary school?

Yes – you can pay for up to $10,000 in tuition expenses for elementary or secondary school. This adds some flexibility to your 529 Plan. If you send your child to a private secondary school, you can tap into your 529 savings to help pay for it.

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