What Are the Pros and Cons of Using a 529 Plan for 2025?

Student Finance & Loan Expert

Planning for your child’s education can be daunting. Many aspects need to be considered, and one essential aspect is your finances. To afford college, Americans apply for scholarships and loans. However, many do not take advantage of other means to get support, including 529 plans.

In 2024, 50% of Americans have no idea what a 529 plan is. Less than 25% have set up a 529 account (Edward Jones & Morning Consult, 2024). To help you know more about 529 plans, I, a career-planning expert with over a decade of professional experience, created this in-depth guide to the pros and cons of a 529 plan.

Key Things You Should Know About the Pros and Cons of 529 Plans for 2025

A 529 plan is a tax-advantaged savings program designed to cover a range of educational expenses, including college tuition, K-12 education costs, and student loan repayment.
Many states offer tax deductions or credits for contributions to their 529 plans. This benefit provides an additional incentive for families to save for education. Notably, some states, such as California and Kentucky, do not offer any state tax deductions or credits for 529 plan contributions.
Account owners can transfer a 529 plan to another beneficiary without incurring penalties, provided that the new beneficiary is a qualified family member of the original beneficiary.

What is a 529 plan and how does it work?
What are the pros of using a 529 plan for 2025?
What are the cons of using a 529 plan for 2025?
What are the federal tax benefits of a 529 plan?
Which states offer tax deductions for 529 plan contributions?
What are the contribution limits for 529 plans?
Can you transfer a 529 plan to another beneficiary?
Can you use 529 plan funds for vocational or technical schools?
How do 529 plans compare with other education funding strategies?
Which factors should you consider when selecting a 529 plan?
How can I maximize the long-term returns of my 529 plan?
Can 529 plans be used for graduate education expenses?
What are the potential penalties for non-qualified withdrawals from a 529 plan?
What are the fees associated with 529 plans?
When is the best time to open a 529 plan?
Can 529 Plans Support Non-Traditional Career Training?
Can 529 plan funds cover online education expenses?
Can accelerated degree programs increase the effectiveness of your 529 plan?
Can 529 plan funds be used for living expenses?
Are 529 plans a good option if parents have bad credit?
What complementary funding options can enhance your 529 plan's effectiveness?
What are the investment risks associated with a 529 plan?
Other Things You Should Know about Using a 529 Plan

What is a 529 plan and how does it work?

A 529 plan is a tax-advantaged savings program designed to cover a range of educational expenses, including college tuition, K-12 education costs, and student loan repayment. Named after Section 529 of the Internal Revenue Code, these plans are available in all 50 states and the District of Columbia, providing a versatile savings option from early education through retirement.

A unique feature is that some funds from a 529 plan can be transferred to a qualified Roth IRA. There are two main types of 529 plans: Education Savings Plans and Prepaid Tuition Plans. Education Savings Plans allow contributions to various investment options, which can be used for qualified education expenses such as tuition and room and board. Prepaid Tuition Plans let individuals lock in current tuition rates for future college expenses.

What are the pros of using a 529 plan for 2025?

Using a 529 plan offers several advantages for families saving for education. In my research of the pros and cons of a 529 plan, I have found the following benefits:

Federal Tax Benefits. Earnings grow tax-free, and withdrawals for qualified education expenses are not subject to federal income tax.
State Income Tax Deductions. Many states offer income tax deductions or credits for contributions to their state’s 529 plan.
High Contribution Limits. Contribution limits can often exceed $300,000 per beneficiary, depending on your state.
Flexibility in Use for Educational Purposes. 529 plans cover a broad range of educational expenses, including tuition, room and board, books, and even some K-12 education costs.
Transferability. If the original beneficiary does not use the funds, they can be transferred to another eligible family member.

What are the cons of using a 529 plan for 2025?

While 529 plans offer numerous benefits, I have found that they also have the following drawbacks:

Penalties for Non-qualified Withdrawals. If funds are not used for eligible educational expenses, the earnings that are withdrawn are subject to federal income tax and a 10% penalty.
Associated Fees. Many 529 plans come with various fees, such as enrollment fees, annual maintenance fees, and management fees.
Limited Investment Options. 529 plans typically offer a restricted selection of mutual funds or age-based portfolios. This may not align with every investor’s risk tolerance or financial goals and limits customization as well as potential growth opportunities.

What are the federal tax benefits of a 529 plan?

529 plans offer significant federal tax benefits that can make them an attractive option for education savings:

Tax-free Earnings. The earnings on investments within a 529 plan grow tax-free. This means account owners do not pay federal income tax on the interest, dividends, or capital gains generated within the account.
Tax-free Withdrawals. Withdrawals are not subject to federal income tax when funds are used for qualified education expenses, such as tuition, room and board, and books.
Gift Tax Benefits. Contributions to a 529 plan qualify for the annual gift tax exclusion. This enables individuals to contribute up to $18,000 per beneficiary per year without incurring gift tax in 2024 (Internal Revenue Service, 2023). Additionally, a special provision allows for "superfunding" the account by contributing up to five years' worth of gifts in a single year, providing a substantial upfront funding option.

Which states offer tax deductions for 529 plan contributions?

Many states offer tax deductions or credits for contributions to their 529 plans. This benefit provides an additional incentive for families to save for education. Notably, some states, such as California and Kentucky, do not offer any state tax deductions or credits for 529 plan contributions. It is advisable to contact the financial services firm that manages 529 plans in your state to know more about available tax benefits.

New York. Taxpayers can deduct up to $5,000 per year for individual filers and $10,000 per year for married couples filing jointly in New York’s College Savings Program.
Indiana. Indiana provides 529 account owners with an income tax credit that is equal to 20% of their Indiana529 contributions. They can receive credits of up to $750 for single return filers and $1,500 for joint return filers per year.
Arizona. In the AZ529 Plan, account owners can deduct up to $2,000 per year per beneficiary for single return filers and $4,000 per year per beneficiary for joint return filers.
Illinois. Illinois allows single return filers to deduct $10,000 and joint return filers to deduct $20,000 per year from state income tax for contributions to its 529 program, Bright Start.
Michigan. Michigan offers 529 plans through the Michigan Education Savings Program and enables deductions of up to $5,000 for individuals and $10,000 for joint filers for contributions.

The chart below provides a visualization for the state income tax deductions allowed by select states for 529 plan contributions.

What are the contribution limits for 529 plans?

As an individual interested in setting up a 529 plan, you may wonder, “How much should you contribute to 529?” Contribution limits for 529 plans vary by state. In my research, I have found that many states set high limits to allow families to save substantial amounts for education. The following are the contribution limits for 15 states:

California: $529,000
New York: $520,000
Texas: $370,000
Florida: $418,000
Pennsylvania: $511,758
Illinois: $500,000
Massachusetts: $500,000
Georgia: $235,000
Idaho: $500,000
Colorado: $500,000
Nebraska: $500,000
Utah: $560,000
Arizona: $575,000
Delaware: $350,000
Kentucky: $450,000

These limits are designed to cover the costs of higher education comprehensively, including tuition, room and board, and other qualified expenses. Understanding the specific contribution limits in your state can help you maximize your 529 plan benefits and ensure sufficient funds for educational needs.

The chart below provides a visualization for the maximum account balance limits set for 529 accounts.

Can you transfer a 529 plan to another beneficiary?

Account owners can transfer a 529 plan to another beneficiary without incurring penalties, provided that the new beneficiary is a qualified family member of the original beneficiary. Qualified family members include the following:

Spouse
Biological child
Stepchild
Foster child
Adopted child
Siblings
Step siblings
Parents
Step parents
Grandparents
Aunts
Uncles
Nieces
Nephews
First cousins

This flexibility ensures that the funds can still be used for educational purposes if the original beneficiary does not need them. Transfers are straightforward and do not trigger taxes or penalties. This enables families to adapt their education savings plans as circumstances change. This feature makes 529 plans a versatile and resilient option for long-term educational savings.

Can you use 529 plan funds for vocational or technical schools?

Fortunately, 529 plan funds can be used for vocational or technical schools, provided that the academic institution is FAFSA-eligible. Many trade schools, technical colleges, and vocational institutions across the country typically accept federal financial aid. Qualified expenses for these schools are similar to those for traditional colleges and universities, covering tuition, fees, books, supplies, and equipment required for enrollment or attendance.

This flexibility makes 529 plans a valuable tool not just for traditional four-year college degrees, but also for career-focused education paths, particularly considering over 16 million American families have set up 529 plans. Moreover, the amount of contributions across the US in 2023 reached approximately $450.5 billion (Hanson, 2024). By allowing the use of funds at a wide range of educational institutions, 529 plans support diverse learning and career opportunities.

How do 529 plans compare with other education funding strategies?

529 plans offer unique tax advantages and long-term growth potential for covering qualified education expenses; however, they may not fully address immediate funding needs or certain expense categories. In comparison, alternative funding solutions such as federal student loans and private school loans provide ready access to liquidity and can cover broader costs, including some living expenses. Assessing tax-free growth benefits against the accessibility and comprehensive coverage of loan funds is essential, as individual financial profiles and risk tolerances differ. This comparative evaluation can help in forming a balanced education financing strategy tailored to both short-term and long-term requirements.

Which factors should you consider when selecting a 529 plan?

When evaluating 529 options, assess the fee structure, investment choices, and management transparency alongside state-specific tax incentives. Review each plan’s historical performance, contribution rules, and flexibility to adjust beneficiary details. Consider how the plan aligns with your long-term financial goals and risk tolerance, ensuring that its design supports a diverse set of educational strategies. For individuals interested in alternative career training paths, explore our article on 6 month certificate programs that pay well.

How can I maximize the long-term returns of my 529 plan?

Align your investment strategy with your risk tolerance and the beneficiary’s time horizon by periodically reviewing and adjusting the asset allocation within your plan. Consider diversifying your portfolio with low-cost index funds and other investment vehicles offered in the plan, ensuring that your strategy evolves as market conditions change. Regular performance benchmarks and individualized risk assessments can guide decisions on whether to shift from growth-oriented to more conservative options. For further insights into strategic financial planning that supports enhanced decision-making in investment management, explore our article on 6 month masters degree programs.

Can 529 plans be used for graduate education expenses?

Graduate education expenses are eligible if the institution qualifies under federal guidelines. Funds can typically cover tuition, mandatory fees, and required course materials for accredited graduate programs. It is important for account holders to confirm that specific costs, such as research fees or specialized program expenses, meet the criteria defined by the Internal Revenue Service. Additionally, evaluating graduate education against alternative career pathways—such as 2 year degrees that earn the most money—can help align education funding with long-term career goals.

What are the potential penalties for non-qualified withdrawals from a 529 plan?

Non-qualified withdrawals from a 529 plan can incur significant penalties. Earnings that are withdrawn will be subject to federal income tax, and an additional 10% penalty is usually applied. Some states may also recapture any state tax deductions or credits previously claimed on contributions.

These penalties can substantially reduce the plan's value. Exceptions to the 10% penalty include situations such as the beneficiary receiving a scholarship, attending a US Military Academy, or passing away. Understanding these penalties is essential for effectively managing a 529 plan and ensuring that the funds are used appropriately to avoid unnecessary costs.

What are the fees associated with 529 plans?

When investing in a 529 plan, it is essential to be aware of the various fees associated because these can impact the overall returns. The following are the common fees that you might encounter:

Enrollment Fees. Some plans charge a one-time fee when you open the account, which covers the initial setup costs.
Annual Maintenance Fees. These fees are charged yearly to cover the administrative costs of maintaining your account.
Management Fees. These are ongoing fees based on a percentage of the assets in the plan and compensating the fund managers for their investment services.
Program Management Fees. Specific to some 529 plans, these fees cover the overall management and operation of the plan.
Underlying Fund Expenses. These are indirect fees related to the mutual funds or investment options within the plan.

When is the best time to open a 529 plan?

Timing is critical to fully leverage the benefits of a 529 plan. Opening an account early harnesses the power of compound interest and allows tax-advantaged growth to accumulate over an extended period. Evaluating your financial outlook and the expected timeline for education expenses can help determine the most beneficial start time. Early contributions, even in modest amounts, can significantly enhance overall returns and offer greater flexibility to adjust your strategy as education costs evolve. Moreover, integrating your savings plan with complementary funding sources, such as career training loans, ensures a well-rounded approach to financing education.

Can 529 Plans Support Non-Traditional Career Training?

Although 529 plans are primarily structured for accredited academic expenses, they can play a role in a diversified funding strategy for specialized career training. For programs that fall outside the conventional academic framework—such as certain technical certifications or aviation training—it is important to assess whether all associated costs meet qualifying criteria. In these instances, integrating 529 plan savings with targeted funding options like pilot student loans can help cover additional expenses. Evaluating program-specific eligibility requirements and aligning funding sources ensures that investment in non-traditional education paths is both strategic and compliant with regulatory guidelines.

Can 529 plan funds cover online education expenses?

Accredited online education programs that are eligible for federal financial aid are generally considered qualified institutions under 529 plans. It is advisable to verify that the online college meets all accreditation requirements and qualifies under FAFSA guidelines before directing 529 funds toward tuition, fees, and related expenses. This consideration is especially important as the prevalence of digital learning continues to rise, and prospective students are increasingly turning to online colleges that take financial aid for flexible education options.

Can accelerated degree programs increase the effectiveness of your 529 plan?

529 plans are designed to support education expenses, and their impact can be enhanced when paired with accelerated academic programs that reduce the overall duration and cost of obtaining a degree. Integrating a 529 plan with fast-track options, such as the fastest degree programs, may shorten the time to degree completion, potentially lowering tuition costs and minimizing cumulative interest on alternative funding sources. This alignment can accelerate the transition into the workforce, thereby improving financial outcomes and reducing opportunity costs. Evaluating program accreditation and ensuring that tuition expenses qualify under the plan’s guidelines remain essential for maintaining both compliance and optimal benefit.

Can 529 plan funds be used for living expenses?

While 529 plans are versatile in covering various education-related costs, they do have restrictions when it comes to living expenses. Qualified expenses typically include tuition, fees, and room and board for students enrolled at least half-time. However, personal living costs such as groceries, utilities, and transportation are generally not covered unless they fall under the room and board category within education-related housing arrangements. Students leveraging off-campus housing must ensure their expenses align with the room and board allowance listed in their school's cost of attendance.

For those exploring alternative ways to fund broader living expenses, it's worth considering options like federal or private student loans. These loans can sometimes cover personal living costs and provide additional financial flexibility. For a deeper exploration of how student financing can address living costs, you can review our detailed guide on "student finance living costs." Understanding the boundaries between qualified and non-qualified expenses with a 529 plan can help you manage your funds effectively and avoid unnecessary penalties.

Are 529 plans a good option if parents have bad credit?

When parents have limited credit options, a 529 plan can serve as a powerful tool for funding education while avoiding reliance on high-interest loans. Unlike parent loans or other credit-dependent financial aids, a 529 plan does not involve credit checks or borrowing costs, making it an effective option for families with poor credit. By starting a 529 plan early, parents can accumulate tax-advantaged savings that grow over time, helping to reduce future financial burdens.

However, it’s essential to recognize that 529 plans may not account for all college expenses, especially when immediate or unexpected costs arise. In such situations, exploring viable financial alternatives becomes critical. Federal loans, grants, and even specialized options like private parent loans might come into play. For parents facing credit challenges, understanding solutions tailored to their financial profiles is vital. To learn more about such options, consider reviewing this guide to parent loans for college with bad credit. Balancing long-term savings with financial strategies to handle current educational needs ensures a comprehensive approach to funding higher education.

What complementary funding options can enhance your 529 plan's effectiveness?

An integrated funding strategy that pairs a 529 plan with other financial resources can address gaps in liquidity and cover expenses not fully met by tax-advantaged savings alone. Consider evaluating options such as scholarships, federal grants, and low-interest student loans to build a diversified education financing plan. In parallel, assessing alternative academic pathways like dual degree programs may help align investment choices with evolving career objectives and unforeseen costs.

What are the investment risks associated with a 529 plan?

While 529 plans offer considerable tax benefits, they also expose investors to inherent market risks. Investment performance depends on the chosen asset allocation, and fluctuations in the market can affect the account’s value. It is important to note that factors such as portfolio turnover, management fees, and the plan’s investment strategy can influence overall returns. Evaluating the risk tolerance and time horizon for each beneficiary is essential. For those exploring education funding alternatives with a focus on career training, consider reviewing online trade colleges for insights into diversified educational pathways.

Key Findings

529 plans have high contribution limits, with some states allowing over $300,000 per beneficiary.
Individuals can contribute up to $18,000 per beneficiary per year in their 529 plans without incurring gift tax.
As of 2023, over 16 million American families have set up 529 plans.
The amount of 529 contributions across the US has reached approximately $450.5 billion.

Other Things You Should Know about Using a 529 Plan

Are 529 plans really worth it?

As you can see from our analysis of the pros and cons of a 529 plan, these plans can be highly beneficial due to their tax advantages and flexibility in covering a wide range of educational expenses. However, their worthiness depends on individual circumstances, such as state tax benefits and investment performance. It is essential to evaluate if they align with your financial goals and needs.

What happens to 529 if kid doesn’t go to college?

If the beneficiary of a 529 plan does not go to college, the funds can be transferred to another eligible family member without penalty. Alternatively, the account holder can withdraw the funds for non-qualified expenses, but this will incur taxes on the earnings and a 10% penalty.

Does 529 hurt chances of financial aid?

A 529 plan can affect financial aid eligibility as it is considered an asset of the parent or student, which may slightly reduce the amount of need-based aid. However, the impact is generally modest on the Student Aid Index (SAI) for federal financial aid calculations. You may explore more of our in-depth guides if you have questions related to student loans, education, and careers, including “Why is college so expensive in the US?”

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