How a 529 works
Contributions are made with after-tax money, grow tax-deferred, and come out tax-free when used for qualified education expenses. Many states add a deduction or credit for contributions to their own plan.
What counts as qualified
- Tuition and mandatory fees
- Books and required supplies
- Computers and related equipment used for study
- Room and board, subject to limits, for students enrolled at least half time
- Some K–12 tuition and certain apprenticeship costs, within caps
Non-qualified withdrawals are taxed on the earnings portion and generally carry a 10% penalty. The contributions themselves are not penalised.
You are not locked into your state's plan
Any state's plan can be used for a school in any state. The reason to prefer your own is the state tax deduction, where one exists — and in several states it does not, which frees you to choose on fees and fund quality instead.
Effect on financial aid
A 529 owned by a parent is generally assessed as a parental asset, which affects aid calculations far less than an asset held in the student's name. Ownership structure matters here more than most people expect.
If plans change
The beneficiary can usually be changed to another family member — a sibling, a cousin, even the parent — without tax consequence. Unused funds are not necessarily stranded.
Age-based portfolios shift automatically toward conservative holdings as the enrolment date approaches, which is the usual default for people who do not want to manage allocation themselves.
Rules and limits change; confirm specifics with your plan provider or a tax professional.