529 Plans Explained: Qualified Expenses, Taxes and Rules

529 Plans Explained: How College Savings and Prepaid Plans Work

529 plans are tax-advantaged accounts, run by states or educational institutions, that help families save for college, other training after high school and some K-12 costs. This guide explains the two main types of 529 plans, which expenses count as qualified under current IRS guidance, how the tax rules work, when leftover money can move to a Roth IRA, and how to compare plans before you open one.

The rules below come from the IRS and the Securities and Exchange Commission’s investor education site, Investor.gov. Several rules changed recently, including the K-12 limit, so it is worth checking the official pages again before you make a withdrawal.

Key takeaways

There are two basic types of 529 plans: prepaid tuition plans and education savings plans.
Contributions are not deductible on your federal return, but earnings are not subject to federal tax when the money is used for qualified education expenses.
IRS Topic 313 now lists a K-12 limit of $20,000 per year per beneficiary across all of that student’s 529 plans, up from $10,000 before December 31, 2025.
Earnings in a nonqualified withdrawal are taxable and generally face an additional 10% federal tax, with some exceptions.
Leftover money may be rolled into the beneficiary’s Roth IRA if strict conditions are met, including a $35,000 lifetime limit.

Table of Contents

What are 529 plans?

According to the IRS 529 plan questions and answers, a 529 plan is run by a state or an educational institution and offers tax advantages, and possibly other incentives, for saving toward a designated beneficiary’s education. The IRS calls these plans “qualified tuition programs,” or QTPs, after Section 529 of the tax code.

A few basic rules apply to every plan:

Anyone can open one. The IRS says there are no income limits and no limit on the number of plans you can open, and you can name any beneficiary.
The account owner stays in control. The person who opens the account controls the money until it is withdrawn, not the student.
The beneficiary can change. Switching the beneficiary to another member of the family has no tax consequences, according to the IRS, and rolling money to a family member’s 529 plan is not taxable either.
Each state has its own plan. States may offer one or both types, while an educational institution can offer only the prepaid type.

Prepaid tuition plans vs. education savings plans

The SEC’s Investor Bulletin on 529 plans describes how the two types work in practice.

Prepaid tuition plans

A prepaid tuition plan lets you buy units or credits toward future tuition and mandatory fees at today’s prices. The credits generally work only at participating colleges, which are usually in-state public schools, and most plans have residency requirements for the saver, the beneficiary or both. Guarantees differ: some states guarantee the money you pay in and some do not. If the student ends up at a school that does not participate, the plan may pay less than it would at a participating school.

Education savings plans

An education savings plan works like an investment account. You choose from options such as mutual funds, exchange-traded funds and sometimes a principal-protected bank product. Many plans offer age-based portfolios, which shift toward more conservative investments as the beneficiary nears college, as well as static portfolios that keep the same mix. Investor.gov notes that mutual fund and ETF investments in these plans are not federally guaranteed, so you can lose money. Only some principal-protected bank products may carry FDIC insurance; our guide to FDIC insurance explains what that covers.

Feature	Prepaid tuition plan	Education savings plan
What you buy	Units or credits toward future tuition and mandatory fees	Investments such as mutual funds or ETFs
Where it can be used	Generally participating schools, often in-state public colleges	Most colleges, including some outside the U.S., plus other qualified expenses
Residency	Most plans have residency requirements	Usually no residency requirement
Main risk	Guarantees vary by state; lower payout if the student does not attend a participating school	Market losses, including loss of principal

Qualified expenses for 529 plans, including K-12 rules

Withdrawals are tax-free only when they pay for qualified expenses. The IRS lists the categories in Topic no. 313, Qualified tuition programs and in its 529 questions and answers.

College and other postsecondary costs

Tuition, fees, books and room and board at an eligible education institution. IRS Publication 970 has the detailed rules for each type of expense.
Computer technology, related equipment and related services such as internet access, if used by the beneficiary and family while the beneficiary is enrolled. Educational software counts; equipment used mainly for entertainment does not.
Fees, books, supplies and equipment required for an apprenticeship program registered and certified with the Secretary of Labor.
Certain qualified postsecondary credentialing expenses, which Topic 313 now lists as a category.

K-12 expenses and the recent change

IRS Topic 313 states that qualified K-12 expenses are limited to a total of $20,000 per year from all of a beneficiary’s 529 plans, and that the limit was $10,000 before December 31, 2025. The list has also grown beyond tuition. According to the IRS, it now covers:

Tuition at an elementary or secondary public, private or religious school
Curriculum and curricular materials, books and other instructional materials
Tutoring or educational classes outside the home
Fees for nationally standardized achievement tests, Advanced Placement exams and college admissions exams
Fees for dual enrollment in a college
Educational therapies for students with disabilities from a licensed or accredited provider, including occupational, behavioral, physical and speech-language therapy

State tax treatment of K-12 withdrawals is set by each state and may not match the federal rules, so check your plan’s documents.

Student loan repayments

Topic 313 also allows 529 money to repay principal or interest on qualified student loans of the beneficiary or a sibling, up to $10,000 lifetime per individual. Interest paid this way cannot also be claimed for the student loan interest deduction.

How 529 plans are taxed

The core federal tax benefits are simple. Contributions are not deductible on your federal return, but earnings grow without federal tax, and withdrawals used for qualified education expenses are not federally taxed. The IRS says such earnings are generally not subject to state tax either. Many states add their own incentives for contributions, such as a state income tax deduction or matching grants, according to Investor.gov, but these may apply only if you use your home state’s plan.

Nonqualified withdrawals

If you take out more than your qualified expenses, part of the earnings becomes taxable. The IRS technical guide Publication 5834 (TG 44) explains that the taxable earnings of a nonqualified distribution are also subject to an additional 10% tax, reported on Form 5329. Exceptions include withdrawals:

Made after the beneficiary’s death or because of the beneficiary’s disability
Paid because the student received a tax-free scholarship, up to the scholarship amount
Related to attendance at a U.S. military academy, up to certain costs
Covering expenses that were used to claim the American opportunity or lifetime learning credit

Income tax on the earnings may still apply in those cases. Publication 5834 also notes that if a school refunds expenses you paid with a 529 withdrawal, you can generally put the refund back into a 529 plan within 60 days to avoid tax on that part.

Coordinating with education credits

Publication 970 explains that you generally cannot use the same expense for more than one education tax benefit. For example, you cannot figure the tax-free part of a 529 withdrawal using the same expenses you used for the American opportunity credit. Each program that made a distribution should send you Form 1099-Q, which shows the gross distribution, earnings and basis.

Rolling a 529 plan into a Roth IRA

For distributions made after December 31, 2023, IRS Topic 313 allows the beneficiary of a 529 plan to roll money into their own Roth IRA tax-free if all of these conditions are met:

The money moves by direct trustee-to-trustee transfer.
The rollover counts toward the Roth IRA annual contribution limit.
Total rollovers stay within a $35,000 lifetime limit.
The 529 account has been open for at least 15 years on the date of the distribution.
The amount does not exceed contributions (and their earnings) made before the 5-year period ending on the distribution date.

Because the rollover counts against the annual Roth IRA limit, moving a larger balance can take several years. Check with the plan and the receiving IRA provider before you start.

How to compare 529 plans

You can generally invest in almost any state’s plan, according to the SEC’s 10 questions to consider before opening a 529 account. These steps can help you compare options:

Start with your own state. Find out whether your state offers a tax deduction or other incentive and whether it requires you to use the in-state plan.
Read the offering circular. This plan document lists fees, restrictions and investment options. The underlying funds’ prospectuses are free from the plan manager or on the SEC’s EDGAR database.
Compare all the fees. Savings plans may charge enrollment or application fees, annual maintenance fees, program management fees and asset management fees. Broker-sold plans may add sales loads and ongoing distribution fees. Weigh any in-state tax benefit against the fees of each plan you compare.
Decide between direct-sold and broker-sold. Direct-sold plans are opened through the state sponsor or program manager. Broker-sold plans offer professional help but usually cost more.
Look at the investment menu. Weigh fees, risk and how many years remain before the student needs the money. Investor.gov notes that federal law currently allows investment changes twice a year or when the beneficiary changes.
Check the funding rules. Investor.gov says many plans have a minimum initial deposit, often $250 or lower, that later deposit minimums may be lower with an automatic investment plan, and that most plans have a lifetime contribution limit.
Verify any adviser. Use the Investment Professional search tool on Investor.gov to check a broker or adviser before you work with one.

529 plans and financial aid

Investor.gov notes that money in a 529 plan generally affects eligibility for need-based financial aid, though schools treat these assets differently, and that savings used for K-12 tuition can also affect aid. Plan the timing of withdrawals with this in mind. You will report assets on the federal aid application, so read our step-by-step guide on how to fill out the FAFSA, and see how grant aid such as the Federal Pell Grant fits alongside savings. If you are still deciding where to start, our comparison of community college vs. four-year college costs shows how much the published averages differ.

Note: This article is general information, not financial, tax or legal advice. Rules can change, so confirm details with the official source or a qualified professional. See our Disclaimer.

Frequently asked questions

Can I use a 529 plan for private K-12 school?

Yes, within limits. IRS Topic 313 lists tuition at public, private or religious elementary and secondary schools as a qualified expense. The combined K-12 limit is now $20,000 per year per beneficiary from all of that student’s 529 plans. State tax rules may differ, so check your plan.

What happens if my child gets a scholarship?

You can generally withdraw up to the amount of a tax-free scholarship without the additional 10% tax, according to IRS Publication 5834 and Investor.gov. The earnings portion of that withdrawal may still be subject to income tax. You can also keep the money in the account or change the beneficiary to another family member.

Are 529 contributions tax-deductible?

Not on your federal return. The IRS says contributions are not deductible, but earnings grow free of federal tax when used for qualified expenses. Many states offer their own deduction or credit, often only for contributions to the in-state plan.

Can I open a 529 plan in another state?

Generally yes. Investor.gov says you can invest in almost any state’s education savings plan, and savings plans usually have no residency requirement. Prepaid tuition plans are different, since most have residency requirements for the saver or the beneficiary.

Can I lose money in a 529 plan?

Yes. Investments in education savings plans, such as mutual funds and ETFs, are not federally guaranteed and can lose value. Prepaid tuition plan guarantees vary by state, so read the plan’s offering documents before you invest.

Official sources

Last checked: November 6, 2026. We review this guide when the official rules change.