An Intro On Investing In A 529 Account For Your Child

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My wife and I were overjoyed to recently welcome the arrival of our first baby.

To financially prepare for having a baby, you can begin saving for your newborn’s future education by opening a 529 account.

While other investment vehicles besides a 529 account can be considered, this article will focus on the basics of what a 529 account is, the rules regarding a 529 account, and the benefits a 529 account provides.

Let’s get started.


A 529 plan is an investment account designed to help you save for educational expenses. According to the U.S. Securities and Exchange Commission, a 529 plan is a plan allowed under Section 529 of the Internal Revenue Service’s (IRS) tax code.

The 529 account owner is the individual who opens the 529 account. When the account is opened, the account owner names a beneficiary. A common 529 account set-up involves a parent owning and contributing money into a 529 account, with their child listed as the account’s beneficiary.

The parent doesn’t have to be the individual that owns the 529 account, though – more on this later.


The U.S. Securities and Exchange Commission identifies 2 different types of 529 plans:

  1. Prepaid tuition plans
  2. Education savings plans

While not every state has both options, all states and the District of Columbia do have at least one of these two options available.

An up-to-date list of 529 plans organized by state can be found on The College Savings Plans Network (CSPN) website. The College Savings Plans Network (CSPN) is an organization created by The National Association of State Treasurers for officials serving at the state level of government. The Network’s purpose is to share information with those in the general public looking to save for education.

Below is an overview on each type of 529 plan:

1. Prepaid Tuition Plans

A Prepaid Tuition Plan allows you to pay of college or university credits/units at today’s current price in anticipation of this price rising by the time your child attends that school in the future.

Given how the cost of attending college and the cost of attending physical therapy graduate school programs have steadily increased over time, this would seem like a great option. However, there are some potential downsides to consider.

First, the money put towards prepaid tuition plans is typically directed only towards tuition and cannot be used to cover other anticipated expenses such as room and board.

Second, while you can prepay tuition at the college and university level, you cannot do so for K-12 tuition.

Third, since the plans are at the state level, the program is most commonly geared towards in-state public schools and residency in that state may be required.

Finally, if your child ends up attending a non-participating school, then your prepaid investment may be worth less than if your child went to a school that accepted a prepaid tuition plan.

For these reasons, my wife and I decided against investing in a 529 Prepaid Tuition Plan for our baby. The rest of this article will focus on the next option: Education Savings Plans.


An Education Savings Plan allows you to save and invest of tax-advantaged money towards your child’s future qualified educational expenses.

This type of 529 plan allows you to place money into an investment account, receive tax deductions for doing so, allow that investment to grow over several years, and then withdraw that money tax-free when used to pay for some of the beneficiary’s education-related expenses.

The types of educational expenses that this money can be spent on tax-free are referred to as qualified educational expenses. Let’s take a look at what constitutes as a qualified educational expense next.


Money from an Education Savings Plan’s 529 account can be used to pay for qualifying expenses at most colleges. These expenses are only considered qualifying expenses at the higher level of education, though. These higher levels of education include vocational programs, college programs, and graduate school programs such as physical therapy, occupational therapy, speech therapy, physician assistant, social work and nursing school programs.

Many of these programs located in the United States qualify and even some programs outside of the United States qualify as well.

According to the U.S. Securities and Exchange Commission and Department of the Treasury Internal Revenue Service as described in Publication 970 regarding educational costs for preparation of 2020 tax returns, qualified education expenses for education savings plans include the following:  


  1. Tuition
  2. Mandatory fees
  3. Books
  4. Computers, software, and internet access
  5. Room and Board

There are a few important details regarding some of the items listed above.

First, in regard to item number 4, expenses related to recreational activities, such as games, are not considered qualifying educational expenses unless primarily used for educational purposes.

Second, in regard to item number 5, the student must be enrolled at least half-time. What’s important to note here is that the definition of what constitutes half-time is determined by the school itself. Additionally, the amount of money that can be used from the 529 account to pay for room and board off campus must be less than or equal to what the college or university charges for on campus room and board.

A 529 plan can also be used to repay student loans. As the Financial Industry Regulatory Authority (FINRA) explains, the passage of the SECURE Act in 2019 allows for money from 529 accounts to be used for student loan payments of up to $10,000. However, it is important to note that this $10,000 limit is a lifetime limit rather than an annual limit that would have allowed for another $10,000 payment the following year.


The Tax Cuts and Jobs Act of 2017 allows for up to $10,000 each year from a 529 account to be used to pay for K-12 schools. Of note, there are no restrictions if the school is public or private or if the school has any religious affiliation. However, no expenses other than tuition are considered qualified educational expenses.


While you may feel some potentially anticipated important, and possibly necessary, expenses were left off of on the list above, these expenses will unfortunately not be considered qualifying expenses.

Some examples of common yet non-qualifying expenses can include the following:

            – School application expenses

            – Cost of transportation

            – Health insurance, even if required by the school

Although you can still use 529 money to pay for non-qualifying expenses, doing so will come with repercussions. Details on this can be found below under “529 Withdrawals/Expenditures on Non-Qualified Education Expenses.”


Just as knowing the rules to any game is important before trying to win, knowing how a 529 account impacts your taxes is vital – the tax benefits are a major reason parents use a 529 account to save for their child’s future education.

Contributing to a 529 account can allow for great tax benefits. Below is a closer look at what tax benefits a 529 account can and cannot provide.

Federal Tax Deductions

Contributions made to a 529 account do not result in a federal tax deduction or credit.

State Tax Deductions

Although contributions to 529 accounts do not provide federal tax deductions, you may qualify for a state tax deduction. There are a few important details to keep in mind depending on your situation.

First, not all states have state income taxes. If you’re fortunate enough to live in one of these states, then you’re already not paying any state income tax so you’re not worrying about getting a 529 state tax deduction. The Tax Foundation, a national non-profit organization focused on tax policies, identifies the following states as not having state income taxes:

  1. Alaska
  2. Florida
  3. Nevada
  4. New Hampshire
  5. South Dakota
  6. Tennessee
  7. Texas
  8. Washington
  9. Wyoming

Unfortunately, some states that have state income taxes do not offer the opportunity for a state income tax deduction when contributing to a 529 account. These states are:

  1. California
  2. Delaware
  3. Hawaii
  4. Kentucky
  5. Maine
  6. New Jersey
  7. North Carolina

Some of the states that do provide the opportunity for state income tax benefits require that the contributor meet certain requirements before qualifying for such benefits. For example, some states require that you pay state taxes in the same state with which you have the 529 plan in order to get that state’s tax deduction or a tax credit.

Additionally, if the contributor does qualify for a state income tax deduction, the amount that can be deducted may be limited to only a portion of the 529 contribution. For example, if you live in New York and contribute to New York’s 529 plan, you can receive a tax deduction for up to $5,000 if you filed taxes as single or up to $10,000 if you are married and filed taxes jointly.

On the other hand, these few states provide the amazing opportunity to deduct your entire 529 contribution on state income taxes:

  1. Colorado
  2. New Mexico
  3. South Carolina
  4. West Virginia

State Tax Credit

Rather than offering state income tax deductions, some states prefer to provide state tax credits for 529 account contributions.

These states include:

  1. Indiana
  2. Oregon
  3. Utah
  4. Vermont

Of note, Minnesota is unique in that it provides either a state income tax deduction or a state tax credit depending on the contributor’s adjusted gross income.

529 Earnings Accumulate Tax Free

Similar to a retirement account, a 529 account is an investment vehicle. Therefore, when you deposit money into a 529 account, you hope that this money will grow over time.

More specifically, a 529 account can be thought of like a Roth IRA retirement account because you already pay taxes on the money that you then invest into a 529 account. That money then grows from your original cost basis and will not be taxed at either the state level or the federal level as long as that money stays inside of your 529 account. By avoiding a loss of money to taxes, your 529 account’s value can increase more quickly.

For example, let’s say that you have some amount of money. After paying taxes, let’s say that amount of money is now $100. If you then deposit that $100 into a 529 account and it grows to be $110, (a 10% return), that $10 will not be taxed.

529 Withdrawals/Expenditures on Qualified Education Expenses

If you withdraw money from a 529 account and spend the money on qualified educational expenses, you will not be taxed.

Using the example above, if you withdrew the $110 in your 529 and spent it on qualified educational expenses, you would not have to pay taxes on that $110.

529 Withdrawals/Expenditures on Non-Qualified Education Expenses

If you withdrew money from a 529 account and spent the money on non-qualified educational expenses, the following penalties will occur:

First, the earnings on the money used from the 529 account will endure a state and federal income tax.

Second, these earnings will also suffer a 10% federal penalty.

Using the previous example, if the $100 your contributed to a 529 account grew to $110, then that $10 growth would be considered your earnings. If your 529 money was spent on non-qualified educational expenses, then you will have to pay a state and federal income tax as well as a 10% federal penalty all on that $10 of earnings.


Intentional Saving

Having a retirement account creates the opportunity for saving towards the intended specific purpose of retirement. Similarly, having a 529 account creates the opportunity for purposeful saving towards your child’s educational expenses.

Also like your retirement account, the ease at which you carryout this intentional saving is improved with the option of setting up automated monthly payments.

Finally, when your child is ready to use that money, the rules on qualified educational expenses help ensure that the money in the 529 account actually gets used for its intended purpose.

It’s Your Money

The money in the 529 belongs to you, as the owner of the account, and not your child. This advantage allows you to better ensure that this money will be put towards the expenses of your child’s anticipated educational needs as intended.

Since the money in your 529 is yours, you can withdraw the money whenever you want and spend it on whatever you want. However, as noted above, the rules regarding spending 529 money on non-qualified expenses will come at a price:

  1. A 10% federal penalty
  2. State and federal income taxes

Some Money in a 529 Account Can Be Protected from Federal Bankruptcy

As described in Title 11 U.S.C. §541(b)(6) of the United States Bankruptcy Code, the money in a 529 account can be protected from federal bankruptcy under certain conditions.  

According to Cornell Law School’s interpretation of the law, found on their Legal Information Institute’s website, these conditions include the following:

  1. Money deposited into the 529 account greater than 720 days ago is protected from federal bankruptcy
  2. Money deposited into the 529 account earlier than 720 days but greater than 365 days prior to the filing of federal bankruptcy is protected from bankruptcy up to the amount determined by the Judicial Conference of the United States
  3. Money deposited into the 529 account less than 365 days ago may not be protected from federal bankruptcy

In addition to the federal law, each state has its own laws regarding bankruptcy. Be sure to discuss the subject of bankruptcy with the appropriate attorney if you seek additional guidance on this subject.

You Still Have Options if Your Child Doesn’t Use the Money

Unfortunately, you can’t predict how the future will play out. Therefore, while saving money in a 529 account for your child’s anticipated future educational expenses can be a good way to plan ahead, things may turn out differently from what you had originally planned for.

If unanticipated situations arise, whether welcomed or otherwise, a 529 account does offer some flexibility to adapt to such circumstances by allowing you to perform one of the following possible options:

  1. Perform a rollover by moving the money from one 529 account to a different 529 account
  1. Change the account’s listed beneficiary from your child to someone else


Who Is Allowed to Open A 529 Account?

According to the College Savings Plan Network, a 529 can be opened by anyone that is at least 18 years old and has a social security number.

Some states allow other entities, such as a trust, to open a 529 account as well. Common owners of a 529 account range from the child themselves to a child’s parent, grandparent, god parent or even a non-related friend.

The account can only be owned by one person, though. Therefore, if a child’s parents would like to open a 529 account, then only one of the parents will be listed as the account owner.

Who Can be a 529 Account Beneficiary?

When a 529 account is opened, a beneficiary must be chosen. The College Savings Plan Network explains that anyone can be listed as a beneficiary, including the account owner themselves, as long as that person has a social security number or federal tax ID number.

Can the Same Beneficiary be Listed on More than One 529 Account?

Yes, your child may be listed as the beneficiary under more than one 529 account.

Who Can Contribute to a 529 Account?

Anyone can contribute to a 529 account, but the potential benefits of simply contributing to an existing 529 versus owning your own 529 can differ.

Does the Listed Owner of the 529 Account Impact the Financial Aid Amount Offered?

Yes. Financial aid opportunities are impacted differently depending on if the owner of a 529 account is child’s parent, your child’s grandparent, or anyone else.

Are There Minimal Required Contributions?

Most states have either a very low minimum required contribution amount or no minimum required contribution amount. That’s right, you can open a 529 account even if you are not ready to contribute to it quite yet. Alabama’s CollegeCounts 529 Fund is an example of this.

Alabama’s CollegeCounts 529 Fund is also an example of how many state plans provide the option of making regular automatic contributions. Just as you might be contributing in this way to your retirement accounts, this set-up helps you free up some time so that you have one less task to worry about.

Minimum Ongoing Contributions

Like the initial minimum contribution, many state plans also do not require a minimum amount of money to be deposited on a regular basis. In other words, like Alabama’s CollegeCounts 529 Fund, you do not have to continue making regular deposits into the 529 account if you don’t want to.

Are There Maximal Contribution Limits?

Unlike with a Roth IRA, the ability to make contributions to a 529 account is not restricted by your age or income.

Another difference from a Roth IRA is that the limit on the amount you can contribute each year is determined by each state rather than at the federal level. Like the minimum required contribution amount, this amount varies by state. However, the limit is typically quite high, often surpassing $250,000.

Your Investment is Not Guaranteed

Speaking of maximal contribution limits, the thought of making large contributions to a 529 account may sounds tantalizing when estimating the account’s potential value by the time your child is ready to use that money.

Do be aware, though, that the U.S. Securities and Exchange Commission warns that 529 plans are sponsored at the state government level and are therefore not guaranteed by the federal government. In fact, not even all of the states that sponsor 529 plans guarantee all of the money you place into such programs, leaving you vulnerable to potentially losing a portion or even all of your investment.


I hope you found this overview on 529 accounts helpful. Now that you have a better handle on the fundamentals of a 529 account, stay on the lookout for more upcoming articles on 529 accounts!

Do you have any additional information to share after reading this article? Any questions on aspects that may not have been covered? Before moving on, please help make the Money Mobilizer a supportive and welcoming community for our current and future colleagues by leaving a question or sharing your knowledge below! 

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