The 411 on the 529: Everything you need to know about saving for college with 529 plans

by Badgley Phelps | Sep 15, 2016

If you have kids, it’s a good idea to know the facts about saving for higher education with 529 plans. Here’s a general overview on what a 529 is, the types of plans available, the benefits, associated fees, penalties and other things you should know.

What is a 529 Plan?

A 529, or Qualified Tuition Program, is a tax-advantaged way to save for your child’s future college expenses. It’s sponsored by a state, state agency or educational institution. There are plans available in all of the 50 states and the District of Columbia—but you can use any state’s 529 and funds may be used at almost any school in the country. There are two types of 529 plans: College Savings Plans and Prepaid Tuition Plans.

What are the benefits of a 529 Plan?

The biggest advantage of both types of 529 plans are the tax advantages they offer. Contributions made to a 529 plan are not tax-deductible for Washington State residents. However, funds in a 529 plan grow tax-deferred, and withdrawals are tax-free as long as the withdrawals are used for the student’s qualified higher education expenses. Here’s a quick list of some of the top benefits of a 529 plan:

  • Tax-deferred growth and tax-free withdrawals for qualified expenses
  • Control
  • Low maintenance
  • Gift tax exclusion
  • Everyone is eligible
  • Flexibility
  • Many states with state income tax offer full or partial tax deduction or credit for 529 contributions
What’s are differences between types of plans?

Despite the shared tax advantages of both College Savings Plans and Prepaid Tuition Plans, they do have some distinctions. First and foremost is the difference in the way your contributions are invested.

College Savings Plans allow you to build an education fund for a student beneficiary through contributions to an individual investment account for which you select the investment strategy. Most College Savings Plans have hired outside investment companies to design and manage their 529 investment programs. You have control over the investments and bear the associated risks. Typically, the investment options available include stock funds, bond funds and age-based portfolios that automatically shift toward a more conservative asset allocation as the beneficiary approaches college age.

Contributions to College Savings Plans can be made at any time and the lifetime contribution limits are quite generous, many exceeding $250,000. Most College Savings Plans have no residency restrictions. This gives you the flexibility to shop around for the plan that offers the combination of features you want.

With Prepaid Tuition Plans, there are no individual investment accounts. Your contributions purchase future tuition credits. To participate, you or the student must be a resident of the state sponsoring the plan. Generally, you purchase units equivalent to a predetermined period of enrollment or credit hour. Only twelve states, including Washington, offer Prepaid Tuition Plans.

Here’s a quick side by side comparison of the two types of 529 plans:

Type of plan

College Savings Plan 

Prepaid Tuition Plan

Lock on tuition



Contribution limits

Generous – many exceeding $250K

Based on predetermined period of enrollment or credit hours

Eligible expenses

Qualified higher education expenses

Tuition and mandatory fees

State guarantee


Yes (most)

Age limit for beneficiary


Yes (most)

Require residency


Yes (most) 



Limited (most)

What’s a qualified higher education expense?

Money saved in a 529 College Savings Plan can be used by the designated beneficiary for future college-related expenses, including:

  • Tuition
  • Room and board
  • Fees
  • Books
  • Equipment
  • Supplies
What are the fees associated with a 529 plan?

There are different fees associated with the different types of plans. While Prepaid Tuition Plans usually require enrollment and administrative fees, College Savings Plans may charge enrollment fees, maintenance fees and asset management fees—as well as commissions if you purchase through a broker. Fees are important to keep in mind as they can lower your eventual return—and should be considered as part of your overall financial plan.

Does a 529 affect financial aid eligibility?

Money saved in a 529 account by a parent or student does affect financial aid eligibility. According to SavingforCollege.com, three factors determine how much need-based aid your child is eligible for:

  • The cost of the school your child is considering or already attending.
  • The dollar amount of "resources" provided to the student from outside sources.
  • The "expected family contribution" or "EFC."

That said, money saved in a 529 by a relative other than a parent has no effect on financial aid eligibility—but it is treated as taxable income for the student.

Will I be penalized for using money from a 529 for something other than college?

If you use the money for something other than higher education expenses, you generally face federal and state income tax on earnings, as well as a 10 percent penalty tax. Exceptions to the 10 percent penalty rule include the following: disability of student, attendance at a U.S. Military Academy and student’s receipt of scholarship. Even though the 10 percent penalty tax is waived in these circumstances, the federal and state income tax on earnings still applies.

Our planning team has the expertise to partner with you in identifying the best strategy for your family to save for college. We can help you define your philosophy for college financial support, evaluate your means and create a plan that both parents and students can get excited about. Contact us today.


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