A 529 plan is a state-sponsored, tax-advantaged savings account designed for education expenses. Contributions grow tax-free, and withdrawals used for qualified education costs — tuition, fees, books, room and board — are never taxed at the federal level.
A 529 plan — formally called a "qualified tuition program" — is a savings vehicle authorized under Section 529 of the Internal Revenue Code. Every state plus the District of Columbia sponsors at least one plan, though you can use any state's plan regardless of where you live or where the beneficiary attends school. The accounts are designed to make education savings straightforward: money goes in after tax, grows free of federal income tax, and comes out tax-free when used for qualifying expenses.
The IRS defines qualified higher education expenses broadly: tuition and fees, books and supplies, room and board (for students enrolled at least half-time), computers and internet access used for school, and up to $10,000 per year in K–12 tuition. The SECURE 2.0 Act added the ability to roll up to $35,000 of unused 529 funds into a Roth IRA for the beneficiary, subject to conditions.
529 plans have no annual federal contribution limit, but contributions are treated as gifts. In 2024, the annual gift-tax exclusion is $18,000 per donor per beneficiary. A special 529 rule called "superfunding" lets you front-load five years of gifts ($90,000 per donor) in a single year without triggering gift tax, as long as no additional gifts are made to that beneficiary during the five-year period. See IRS Publication 970 for full rules.
Non-qualified withdrawals are subject to ordinary income tax plus a 10% federal penalty on the earnings portion only — not on your contributions. The penalty is waived in certain situations, including the beneficiary receiving a scholarship, attending a U.S. military academy, or becoming disabled. The SEC's investor bulletin on 529 plans covers the rules in plain language.