With a 529 plan, you can stack up the books, not the debt. No matter how old your child is, it might be time to consider a qualified tuition program (QTP), also known as a 529 plan. For many families, such a plan offers a more convenient way to save money for college.
A great way to save
First they wanted toys, then computers. Now they want to go to college. The cost of raising children adds up, and rising college tuition multiplies the headaches triggered by a family’s already-dwindling bank account.
But planning ahead can prevent a future of sleepless nights—tossing and turning as you fret over education expenses—and graveyard diner shifts for your financially struggling student.
No matter how old your child is, it might be time to consider a qualified tuition program (QTP), also known as a 529 plan. For many families, such a plan offers a more convenient way to save money for college.
“I want my daughter to have enough money to go through school without taking out loans,” said Terri Knight, who works in the financial aid office at Red Rocks Community College in Lakewood, Colorado. “It is a proactive way to save for college,” referring to a 529.
Working in financial services at a college helped Knight see the importance of starting early. Her daughter is only 3 years old, but by the time she’s ready to leave the nest, her mother will have built up a nice nest egg for tuition costs.
"Five twenty-nine plans are tax-advantage programs that help families save for post-secondary education. ... We personally think it’s one of the best things that Congress has ever done," says Patricia M. Kane, senior financial adviser, Connecticut Wealth Management.
Why a 529 plan?
Named for Section 529 of the Internal Revenue Code, most 529 plans are operated by individual states, which can offer prepaid tuition and savings plans under the program. Some educational institutions can also offer prepaid tuition 529 plans, although Kane said that most investors opt for the savings plan, since identifying a higher-education institution for a young child can be a challenge.
“Five twenty-nine plans are tax-advantage programs that help families save for post-secondary education,” said Patricia M. Kane, senior financial adviser for Connecticut Wealth Management. “That’s it in a nutshell. And the savings can be used not just for college, but for trade school, culinary school, graduate school, even private K-12 tuition—there’s a list of opportunities. We personally think it’s one of the best things that Congress has ever done.
”A major benefit of 529 savings plans is that, although contributions are not tax-deductible at the federal level, the interest is not subject to federal tax. As long as the money is used only to pay for qualified educational expenses for the designated beneficiary—the student named as the beneficiary of the plan—the money taken out is also tax-free. On many states' tax forms, contributions are partially or fully deductible, but most require that the plan be taken out in the contributor's home state to get the deduction.
With the prepaid tuition option, taxpayers can lock in current tuition rates at qualified in-state public educational programs, even if the future student is still in diapers. But keep in mind that the student or the student’s family will have to make up the difference for out-of-state programs, which can cost substantially more than in-state tuition—double or triple the amount in some cases, depending on the school.
Is setting up a 529 plan complicated?
The Internal Revenue Service has a web page and a variety of publications designed to help taxpayers determine if a 529 plan is right for them. The most complicated aspect is likely to be choosing from the variety of options.
Every state offers at least one 529 plan. The plans vary from state to state, and you may take out a plan in any state you choose, regardless of where you live and what institution your student will eventually attend. For example, you may live in California, take out a 529 plan in Colorado and send your student to a school in Massachusetts. It all depends on which state plan offers the benefits you want.
“The best place to start is with your own state,” said Kane, “because your own state will often have tax advantages for you.”
Once you’ve determined how to take full advantage of your state's tax benefits, Kane suggests that you look at other states’ plans as well. “Your state’s plan may not be as cost-effective or high-performing,” Kane said, “All plans have fees. Low fees and high performance are the keys.”
Remember, a 529 plan is an investment. Many states offer several types of plans, ranging from safe to aggressive, so individual taxpayers may determine the best fit for their finances.
While the range of choices might seem overwhelming, each state has a website offering detailed information on its plans. Once you choose the program, you may make contributions and watch the account grow. And because anyone may contribute to the fund, grandparents, aunts, uncles and even friends may help give the gift of a higher education.
What's the catch?
While there’s no “catch,” you should keep some things in mind. The money in a 529 savings plan has been limited to use for higher education costs only up until 2018. Beginning in 2018, 529 plan funds can be used for K-12 tuition as well. If you take money out for other reasons, you might be subject to a 10 percent penalty as well as taxes on your withdrawal.
Kane noted, however, that there must be earnings in the account for you to be penalized for a withdrawal. “If it hasn’t performed well, there are no penalties,” Kane said. “You only pay penalties on earnings, not on the principal if you take this out.”
Another consideration is gifting limitations. The federal government establishes limits on how much each individual may contribute to a 529 plan per year, and any amount above that can be subject to gift tax. For 2026, the tax-free contribution limit for each individual is $16,000 per beneficiary. Couples filing taxes jointly may contribute a total of $32,000 per year per beneficiary without paying gift tax. Each state has limitations on contributions as well, but “those numbers are usually very large,” said Kane.
So, why not a 529 plan?
“These plans are very popular, but people have been reticent to put money in because the markets had not been performing well in the past,” said Denis Horrigan, a principal of Connecticut Wealth Management.
“But by saving money outside of a 529 plan, you’re losing the benefits of tax deduction and earnings. And 529 plans are both a great college savings tool and a great estate planning tool.”
An attractive aspect of a 529 plan is that it allows you to remove assets from your estate while you remain in control. “We think that’s one of the best features of a 529 plan,” Kane said. “You can roll over your assets from one plan to another. You can change beneficiaries. You control your investments.”
And as new IRS policy allows 529 plan funds to be used for the purchase of computer technology, including equipment and Internet access, you can even buy your college-bound student that new laptop.
A 529 plan at tax time
What happens at tax time when you’ve taken money out of your 529 plan to pay for higher-education expenses? The procedure is simple.
When you pay for expenses, including tuition, books, computer equipment, and room and board, the school in which your beneficiary is enrolled issues a Form 1099-Q documenting the expenses, explained Patricia M. Kane, senior financial adviser for Connecticut Wealth Management. The state that carries your 529 plan will issue a 1099 documenting how much you have withdrawn from the plan.
You file this form with your taxes. The IRS will also have a copy and will match these expenses with what you have withdrawn from your 529 account. When those expenses match up, you’re home free—and tax-free.
If your individual contributions to a 529 plan exceed the allowable maximum set by the IRS, you must file Gift Tax Form 709. With regard to state taxes, your own state and the state in which you carry your 529 plan have specific guidelines that you may consult to determine any forms to be filed.
Let an expert do your taxes for you, start to finish with TurboTax Live Full Service. Or you can get your taxes done right, with experts by your side with TurboTax Live Assisted. File your own taxes with confidence using TurboTax. Just answer simple questions, and we’ll guide you through filing your taxes with confidence. Whichever way you choose, get your maximum refund guaranteed.