The Tax Benefits of 529 Plans


A 529 plan is a saving plan which provides tax advantages to encourage saving for college. 529 plans are sponsored by states, state agencies, or educational institutions. There are two types of 529 plans: Prepaid Plans and College Savings Plans.

Plan Types

  • The 529 College Savings Plans grows tax-free and can be withdrawn tax-free for educational expenses like tuition, room and board, and required textbooks and computers.
  • The 529 Prepaid Plans allow you to prepay part or all of an in-state public tuition, locking in the tuition at time of payment.

Your 529 plan investment will grow tax-deferred, and qualified withdrawals are federally tax-free and state-tax exempt in many states. 34 states offer tax deductions or credits on contributions to 529 plans. Click on the map below to see if your state offers a tax deduction or credit.


Can I pick a 529 plan in a different state?

Yes, however your state’s 529 plan may offer incentives to win your business. For instance, in the state of Indiana taxpayers can earn a state income tax credit equal to 20% of their contributions to a CollegeChoice 529 account, up to $1,000 per year. Since I’m a resident of Indiana, I will receive a $1,000 state income tax credit if I were to contribute $5,000 to the Indiana 529 plan. These incentives are state specific.

Can I use my 529 plan on non-educational expenses?

No, if you withdraw money from a 529 plan and do not use it on a qualifying eligible college expense, you will be subject to income tax and an additional 10% federal tax penalty on earnings.

Who is eligible for a 529 plan?

Any U.S. taxpayer can open a 529 plan for a U.S. Citizen or Resident Alien, including themselves. There is no limit to the number of plans you set up, and there are no income restrictions.

Whose name should I put on the 529 plan?

Whoever purchases the 529 plan is the custodian and controls the funds until they are withdrawn. You, as the custodian of the plan, will ultimately decide when the funds are released and what they are used for. You will set a beneficiary when you create the plan, however there is no penalty if you decide to change the beneficiary in the future.

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Amy Northard, CPA

Amy Northard, CPA

Founder of The Accountant for Creatives®
+ taxes + bookkeeping + consulting
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