How Much is Your State’s 529 Tax Deduction Really Worth for 2025?

by Alex Hillsberg , MA

Student Finance & Loan Expert

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While college education can help individuals build successful careers, college tuition and fees can be a huge financial burden to Americans. Four-year academic institutions in the United States (US) charged between $9,800 (public institutions) and $40,700 (private nonprofit institutions) on average in the academic year 2022–2023 [National Center for Education Statistics (NCES), 2024]. This is why educational assistance programs, such as 529 plans, are essential. To help you or your child get started on 529 plans, I created this in-depth guide to 529 tax deduction terms and other plan benefits.

Why should you learn more about 529 plans?

• Learning about 529 plans can help you take advantage of significant tax benefits, including tax-free growth and tax-free withdrawals, for qualified education expenses.
• Understanding how 529 plans affect financial aid eligibility is crucial for maximizing your child's aid package. By strategically planning contributions and withdrawals, you can minimize the impact on your Student Aid Index (SAI), demonstrating your financial capacity for college. It can also potentially increase the amount of financial aid received.
• These plans enable you to choose from various investment options. You also maintain control over the funds and can change the beneficiary if needed.

Table of Contents

1. What is a 529 plan?
2. What are the main benefits of a 529 plan for 2025?
3. Who is eligible to open a 529 plan?
4. How do tax deductions for 529 plans vary across different states?
5. How do investment options differ among state 529 plans?
6. What are the maximum contribution limits for 529 plans by state?
7. Can 529 plans be used in conjunction with other financial aid options?
8. How do 529 plans compare to student loans?
9. What are the fees and expenses associated with a 529 plan?
10. What expenses are considered qualified for 529 plan distributions?
11. Can a 529 plan support alternative career paths?
12. Can 529 Plans Fund Dual Degree Programs?
13. What happens if the beneficiary does not need the funds?
14. When Should You Integrate Student Loans With Your 529 Plan Savings?
15. Should 529 Plans Be Integrated into Your Estate Planning Strategy?
16. Can 529 Plans Be Used for International Education?
17. What are the potential risks of investing in 529 plans?
18. How are 529 plan withdrawals taxed?
19. What should you avoid when choosing a 529 plan?
20. Can you use 529 plans for part-time students?
21. Can 529 plans finance career training programs?
22. Everything Else You Need to Know about 529 Tax Deductions

What is a 529 plan?

A 529 plan is a tax-advantaged financial program that covers college tuition and fees, K-12 education expenses, and student loan repayment, among other qualified costs. The name of these plans is based on Section 529 of the Internal Revenue Code, and all 50 states and the District of Columbia offer these plans to eligible individuals. Thus, a 529 plan can prove to be beneficial from preschool education to retirement since a certain amount of funds from a 529 plan can be transferred to a qualified Roth individual retirement account (IRA).

Two major types of 529 plans are available:

• Education Savings Plans. Education savings plans enable individuals to contribute money allotted for select investment options. Account holders can withdraw from these plans to use for qualified college and K-12 education costs, such as tuition and room and board.
• Prepaid Tuition Plans. Prepaid tuition plans allow individuals to pay college expenses in advance at rates set when the accounts were established. These plans increase in value over time, and withdrawals are not taxable.

What are the main benefits of a 529 plan for 2025?

Many ask, “Why are colleges so expensive?” Fortunately, more than 16 million families in the US have savings in 529 plans, with $450.5 billion in total in 2023 (Hanson, 2024). During my research, I have found the following benefits, which you can explore to know more about why these families take advantage of this financial vehicle:

• Tax-free Growth. Earnings on investments in a 529 plan grow tax-free. This makes your savings grow quicker compared to taxable accounts.
• Tax-free Withdrawals. Withdrawals from a 529 plan are also completely tax-free when used for qualified education expenses.
• State Income Tax Deductions. Many states offer income tax deductions for contributions to their 529 plans. Notably, nine states do not require income tax, so they do not have provisions for 529 contribution deductions. These states are Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
• Flexibility in Use. Funds can be used for a wide range of education-related expenses, including tuition, course materials, and room and board, depending on the type of 529 plan that you choose.

Who is eligible to open a 529 plan?

Any US citizen or resident alien over 18 years old with a valid Social Security number or taxpayer identification number can open a 529 plan. This includes parents, grandparents, relatives, friends, and the beneficiary themselves. There are no income restrictions, so anyone can contribute regardless of their financial situation.

Moreover, the account owner does not need to be related to the beneficiary. Most plans also allow the account owner to retain control over the account, including making investment decisions and changing the beneficiary if necessary. Notably, the account owner must be at least 18 years old; the beneficiary does not have an age limit.

How do tax deductions for 529 plans vary across different states?

I have found that the terms for 529 plans vary across the US. Explore the tax benefits offered by some states below:

1. Georgia

The state of Georgia offers the Path2College 529 Plan. It allows account owners to deduct state income tax for a maximum contribution of $4,000 per year per beneficiary. Those filing a joint return can deduct up to $8,000 per year per beneficiary.

2. Idaho

The state of Idaho offers its 529 college savings plan in the form of the IDeal program. Idaho taxpayers are qualified for a state income tax deduction of $6,000 maximum for 529 contributions. Those filing joint returns can deduct up to $12,000.

3. Utah

The state of Utah offers my529 plans to individuals, including parents, grandparents, and employers. These plans enable them to save and invest in tuition, books, supplies, devices, and room and board, among other things. Notably, account owners can claim tax credits only if the beneficiary is younger than 19 when designated on the account. Moreover, only corporations are allowed state income tax deductions for 529 contributions of up to $2,410 as of June 2024.

4. Arizona

Arizona provides residents with the AZ529 Plan, which enables account owners to save and invest as little as $15. Single return filers can also deduct from state income tax for 529 contributions of up to $2,000 per year per beneficiary. Those filing joint returns can deduct up to $4,000 per year per beneficiary.

5. Colorado

The state of Colorado offers the CollegeInvest 529 Savings Plan, which helps contributions grow tax-free at the federal and state levels when used for eligible expenses. This savings plan allows state income tax deductions of up to $22,700 per year per beneficiary for single return filers. Meanwhile, those filing joint returns can deduct up to $34,000 per tax filing per beneficiary.

6. California

The state of California offers 529 plans through ScholarShare 529. However, California does not allow income tax deductions for contributions to the program or 529 plans in other states.

7. Delaware

Delaware provides 529 plans through DE529, which is managed by Fidelity Investments. Account owners are allowed state income tax deductions for contributions of up to $1,000 for single return filers and $2,000 for joint return filers.

8. Nebraska

The state of Nebraska offers the NEST 529 program. Savings plans in this program have a contribution limit of $500,000 and a state income tax deduction limit of $10,000 each year.

9. Kentucky

The state of Kentucky provides 529 plans through KY Saves 529. While growth from your contributions are tax-deferred and withdrawals are tax-free, Kentucky does not allow state income tax deductions for 529 contributions.

10. Massachusetts

Massachusetts offers its 529 college savings plan called the U.Fund. Account owners are allowed to claim state income tax deduction for a maximum contribution of $1,000 for single return filers and $2,000 for joint return filers.

The chart below visualizes the current maximum state income tax deductions per beneficiary per year for individuals who file single returns.

How do investment options differ among state 529 plans?

Across the US, 529 plans offer different investment options that individuals can take advantage of. Notably, in 2023, 529 accounts increased by an average of $169.04 monthly (Hanson, 2024).

• Age-based Portfolios. These portfolios automatically adjust the asset allocation based on the beneficiary's age. Usually, they shift from higher-risk investments, such as stocks, to lower-risk investments, such as bonds and cash, as the beneficiary approaches college age. This reduces risk as the time to use the funds nears.
• Static Portfolios. These portfolios maintain a fixed asset allocation regardless of the beneficiary's age. Investors can choose a mix of stocks, bonds, and other assets based on their risk tolerance and investment strategy. This allows for more personalized control over their investment.
• Individual Fund Options. Some plans allow investors to select individual mutual funds or exchange-traded funds (ETFs) to create a customized portfolio. This option provides flexibility and control and enables investors to modify their investments to their specific preferences and market outlook.

What are the maximum contribution limits for 529 plans by state?

You may wonder, “How much can I contribute to a 529 plan?” The maximum account balance limits for 529 plans vary significantly by state. The following contribution limits demonstrate the differences in educational cost projections and funding strategies:

• Georgia imposes a cap of $235,000.
• Idaho, Colorado, Nebraska, and Massachusetts each set their limits at $500,000.
• Utah's limit is slightly higher at $560,000.
• Arizona offers one of the highest limits at $575,000.
• California's 529 plans can accumulate up to $529,000.
• Delaware's limit stands at $350,000.
• Kentucky allows up to $450,000.

These caps ensure that 529 plan contributions remain within practical limits while providing ample opportunity for substantial educational savings. Understanding these limits is important for families planning long-term education funding strategies.

The chart below illustrates the maximum account balance limits for 529 plans per beneficiary by state based on current data from each program’s website.

Can 529 plans be used in conjunction with other financial aid options?

Fortunately, 529 plans can be used in conjunction with other financial aid options. While 529 plans are considered an asset in financial aid calculations, their impact is relatively minimal. Usually, only a small percentage of the 529 plan balance is counted in the SAI on the FAFSA. This ensures that most financial aid eligibility remains intact.

Students can still qualify for scholarship programs and student loan programs even if they have a 529 plan. Moreover, withdrawals from a 529 plan used for qualified education expenses do not count as income on the FAFSA. Combining 529 plans with other financial aid sources provides a more comprehensive funding strategy, ensuring that students have sufficient resources for their education.

How do 529 plans compare to student loans?

While 529 plans serve as an excellent vehicle for saving toward educational expenses, it's important to understand how they compare to student loans, another key funding option widely used by students and families. Unlike savings plans, student loans provide immediate access to funds, which can cover not only tuition but also living expenses, transportation, and other costs that may extend beyond qualified education expenses under a 529 plan. However, loans accrue interest over time, creating a long-term financial obligation that does not apply to savings accumulated in a 529 plan.

The flexibility of student loans can be advantageous for students who have not had the opportunity to save in advance, particularly for those facing unexpected college costs. However, loans should be approached cautiously due to the financial commitment they entail. For those weighing their options, exploring reputable school loan companies can provide insight into the most favorable interest rates, repayment options, and borrower protections.

Ultimately, combining 529 plans with student loans—or leveraging both within a financial strategy—may help families customize their approach based on their specific financial situation and educational goals. This dual approach can strike a balance between minimizing debt and ensuring sufficient resources to cover all college-related costs.

What are the fees and expenses associated with a 529 plan?

529 plans can include a range of fees that may impact overall returns. Typical charges encompass management fees, expense ratios on investment options, administrative costs, and program-specific maintenance fees. These fees vary by plan and state, making it crucial to perform a detailed fee comparison before committing funds. Evaluating these costs helps ensure that the potential growth of the account aligns with long-term education funding goals. Additionally, understanding fee structures aids in comparing 529 plans with other financing methods; for example, explore how long does a student loan take to get to assess alternative funding timelines and obligations.

What expenses are considered qualified for 529 plan distributions?

Understanding what expenses are covered by 529 plans is essential for maximizing the benefits of these education savings accounts. The funds must be used for qualified education expenses to remain tax-free. I have found that the following are the main categories of expenses that 529 plans can cover:

• Tuition and Fees. 529 plan funds can cover the cost of tuition and mandatory fees at eligible educational institutions, including colleges, universities, vocational schools, and K-12 schools, depending on your plan and your state.
• Books and Supplies. Required books, supplies, and equipment for courses are qualified expenses, ensuring that students have the necessary materials for their studies.
• Room and Board. If the student is enrolled at least part-time, expenses for on-campus housing and meal plans are covered, as well as off-campus housing costs within certain limits.
• Computers and Technology. Computers, software, and internet access used primarily for educational purposes are eligible expenses.
• Special Needs Services. For students with special needs, 529 plans can fund necessary services and equipment to provide vital support for their educational experience.

Can a 529 plan support alternative career paths?

While 529 plans are primarily designed for traditional higher education expenses, it is important to assess whether this funding mechanism aligns with alternative career pathways. Some industries offer opportunities through vocational training and certifications rather than a conventional college degree. For example, in healthcare, there are medical jobs that pay well with little schooling that may require only short-term training. Evaluating the flexibility of your 529 plan in covering non-traditional educational costs can help determine if these funds should complement or be set aside in favor of other investment strategies better suited for quicker entry into the workforce.

Can 529 Plans Fund Dual Degree Programs?

529 plans cover qualified tuition and related expenses at eligible educational institutions, including those offering dual degree programs. Ensure that both degree programs are provided by accredited institutions meeting IRS eligibility requirements. Verify with your plan administrator if combined academic costs or overlapping terms need special consideration. Explore financial strategies for integrated curricula by reviewing top colleges with dual degree programs to maximize tax advantages and efficient fund allocation.

What happens if the beneficiary does not need the funds?

In cases where the beneficiary does not pursue higher education or requires less funding than anticipated, leftover balances can be managed through several options. Account owners can change the beneficiary to another eligible family member or repurpose funds for qualified expenses in future educational endeavors, including online programs. For instance, those considering continued education while working can review the best online colleges for working adults to align unused funds with career advancement goals. Note that nonqualified withdrawals remain subject to income tax and additional penalties on earnings.

When Should You Integrate Student Loans With Your 529 Plan Savings?

Assessing the right time to blend tax-advantaged savings with borrowing can be crucial for minimizing education costs. Evaluate your projected tuition gap and financial aid offers early on; this allows you to determine if supplementing your 529 plan with loans is necessary. Review your budget, anticipated expenses, and enrollment dates to ensure that your savings cover the maximum of qualified costs. In parallel, confirm key timelines and eligibility details by checking the federal student loan application deadline. This approach facilitates a balanced funding strategy that optimizes both growth and liquidity without overexposing you to high-interest debt.

Should 529 Plans Be Integrated into Your Estate Planning Strategy?

Evaluating 529 plans as part of an overall estate planning strategy can help optimize wealth transfer while potentially leveraging annual gift tax exclusions. Account owners may use these plans to reduce the taxable estate by contributing amounts that qualify as completed gifts, all while maintaining control over the investment. Strategic planning should consider variations in state-specific benefits and potential impacts from changing residency. Comparing 529 plans with other financing methods, such as small school loans, can also provide additional insights to ensure a holistic approach to managing educational funding and legacy objectives.

Can 529 Plans Be Used for International Education?

Some families explore using 529 plan funds for international education; however, only foreign institutions that meet IRS eligibility criteria qualify. Institutions outside the United States must participate in U.S. federal financial aid programs to be considered eligible, and offering courses that align with qualified expenses such as tuition, fees, and accommodation is essential. It is important to verify the institution’s status with your plan administrator before committing funds to avoid unexpected penalties. Additionally, consider reviewing online colleges that have financial aid if you are looking for alternative accredited education options that maintain eligibility for tax benefits.

What are the potential risks of investing in 529 plans?

While 529 plans offer tax benefits and a structured approach to saving for education, investors should be aware of potential risks. Market volatility can affect the growth of invested funds, and fluctuations may delay reaching savings goals. Additionally, plan limitations—such as restrictions when the beneficiary’s educational needs change—can reduce flexibility. State regulatory changes might also modify tax advantages or contribution limits, impacting the overall strategy. Reviewing fee structures and investment options carefully can help balance these risks with long-term education funding objectives, and comparing alternative education financing, such as a lowest cost online bachelor's degree, may further optimize your approach.

How are 529 plan withdrawals taxed?

Withdrawals from 529 plans are tax-free at the federal level when used for qualified education expenses, such as tuition, fees, books, and room and board. This federal tax advantage can significantly reduce the cost of education. However, non-qualified withdrawals are subject to federal income tax and an additional 10% penalty on earnings.

Meanwhile, state taxation varies. Some states fully or partially follow federal rules, while others may impose additional taxes on non-qualified withdrawals. Understanding these tax implications ensures that families maximize their savings and avoid unexpected tax liabilities.

What should you avoid when choosing a 529 plan?

Choosing the right 529 plan is essential to get the most out of your educational savings. To ensure your investment grows efficiently, you must avoid common pitfalls that can undermine the plan's benefits.

• High Fees. High management fees and administrative costs can significantly reduce the growth of your 529 savings over time. Compare plans and choose one with low fees to maximize your investment returns.
• Limited Investment Options. Some 529 plans offer a narrow range of investment choices, which can restrict your ability to diversify and manage risk. Look for plans that provide a variety of investment options, including age-based portfolios and diverse asset classes.
• State Residency Requirements. While many states offer tax benefits for residents who invest in their state's plan, not all 529 plans are created equal. Avoid choosing a plan solely based on state residency if it has poor performance or high fees. Instead, consider plans from other states that might offer better benefits and lower costs, as many states allow out-of-state residents to invest in their 529 plans.

Can you use 529 plans for part-time students?

While 529 plans are commonly associated with full-time educational pursuits, they are also applicable to part-time students, provided the expenses qualify under the plan's guidelines. Eligible expenses for part-time students include tuition, fees, books, and equipment required for enrollment. However, it's crucial to ensure that the part-time institution is an eligible educational institution as per the IRS definition. For those considering combining 529 plans with additional funding sources like loans, it's beneficial to understand when do part time student loans open to better align savings strategies with loan timelines.

529 plans can thus serve as a flexible financial resource, accommodating a variety of education paths, including part-time studies, which offer significant flexibility for working students or those balancing family commitments while pursuing further education.

Can 529 plans finance career training programs?

While designed primarily for higher education, some 529 plans may cover qualified expenses for career training programs, including vocational courses and professional certifications. Eligibility details can differ significantly by state and by individual plan, so reviewing plan documents and consulting with a financial advisor is essential to ensure that alternative education paths are supported under your account rules. Additionally, some plans could allow funding for programs outside traditional degree paths, complementing formal education with targeted skill development opportunities, such as short certificate programs that pay well.

Key Findings

• A 529 plan is a tax-advantaged financial program that covers college tuition and fees, K-12 education expenses, and student loan repayment, among other qualified costs.
• More than 16 million families in the US have savings in 529 plans, with $450.5 billion in total in 2023 (Hanson, 2024).
• Any US citizen or resident alien over 18 years old with a valid Social Security number or taxpayer identification number can open a 529 plan.
• Income tax deductions vary per state. Some states do not allow them, while others allow deductions of at least $1,000 per beneficiary per year for single joint filers. Due to differences in tax deduction terms, applicants of 529 plans must ensure that they understand their options for educational savings packages.
• You can contribute up to $18,000 per year per beneficiary without incurring federal gift tax. You can also choose to "superfund" the account by contributing up to five times the limit at once and spreading it over five years for gift tax purposes.

Other Things You Should Know about 529 Tax Deductions

Does a 529 reduce your taxable income?

Yes, contributions to a 529 plan can reduce your taxable income if your state offers a tax deduction or credit for contributions. However, there is no federal tax deduction for 529 plan contributions.

How much can you contribute tax-free to 529?

You can contribute up to $18,000 per year per beneficiary without incurring federal gift tax. You can also choose to "superfund" the account by contributing up to five times the limit at once and spreading it over five years for gift tax purposes. Contributions grow tax-free, and withdrawals are also tax-free when used for qualified education expenses.

How do I include 529 contributions on my tax return?

To include 529 contributions on your tax return, you need to claim any state tax deductions or credits on your state tax return, if applicable. Remember to keep records of your contributions and consult your state's specific tax forms and instructions for reporting.

References:

1. Federal Student Aid (n.d.). What is the Student Aid Index (SAI)? https://studentaid.gov/help-center/answers/article/what-is-sai
2. Hanson, M. (2024, June 30). College Savings Statistics. Education Data Initiative. https://educationdata.org/college-savings-statistics
3. National Center for Education Statistics. (2024). Price of Attending an Undergraduate Institution. Condition of Education. U.S. Department of Education, Institute of Education Sciences. https://nces.ed.gov/programs/coe/indicator/cua