What a 529 plan is
IRS Topic 313 describes a qualified tuition program, the section 529 plan, as a program established and maintained by a state, or an agency or instrumentality of a state, or by an eligible educational institution, that lets a contributor prepay or save for a beneficiary's education. The tax treatment has three parts: contributions are not deductible on the federal return; earnings accumulate tax free while in the account; and distributions are not taxable when used to pay for qualified higher education expenses. Publication 970 adds that there are no income restrictions on the individual contributors.
What the money can pay for
| Expense | Rule |
|---|---|
| Tuition, fees, books, supplies and equipment at an eligible postsecondary school | required for enrollment or attendance |
| Room and board | for a student enrolled at least half time, up to the greater of the school's cost-of-attendance allowance or the actual charge for school-owned housing |
| Computer equipment, software and internet access | used primarily by the beneficiary while enrolled |
| Registered apprenticeship programs | fees, books, supplies and equipment required for participation |
| Elementary and secondary school tuition | up to $20,000 per year from 2026; $10,000 before December 31, 2025 |
| Student loan repayments | principal or interest on the beneficiary's qualified student loans, $10,000 lifetime per individual |
The list is from Topic 313 and Publication 970. Transport, insurance and ordinary living costs beyond the room and board allowance are not on it, and neither is a school that is not eligible to participate in federal student aid programs, which is the test for "eligible institution".
Taking money out for something else
A withdrawal that is not matched by qualified expenses is not a penalty on the whole amount; it taxes the earnings. Publication 970 splits every distribution into contributions, which come back untaxed because they were never deducted, and earnings, in the proportion the account holds them. The earnings are tax free only in the ratio of qualified expenses to the total distribution, and the rest is income plus a 10 percent additional tax.
| Example | Amount |
|---|---|
| Distribution | $10,000 |
| Earnings portion of it | $3,000 |
| Qualified expenses paid that year | $7,000 |
| Tax-free earnings | $2,100 |
| Taxable earnings, reported on Schedule 1 (Form 1040), line 8z | $900 |
| Additional 10 percent tax on them | $90 |
The 10 percent tax falls away in the cases Publication 970 lists: a distribution after the beneficiary's death or because of disability; a distribution that is taxable only because the beneficiary received a tax-free scholarship, veterans' or employer assistance, up to that amount; attendance at a US military academy; and expenses used for the American opportunity or lifetime learning credit instead. In those cases the earnings are still income, but the surcharge is not owed.
Leftover money
- Change the beneficiary to a family member, or roll the account over to another 529 or an ABLE account for the same beneficiary or a family member within 60 days, which Publication 970 treats as nontaxable.
- Roll it to the beneficiary's Roth IRA, by direct trustee-to-trustee transfer, from an account open for more than 15 years, excluding contributions and earnings from the last five years, with each year's rollover counting against the annual IRA contribution limit. Publication 970 lists the conditions; the plan administrator handles the transfer.
- Pay student loans, up to the $10,000 lifetime figure per individual.
- Withdraw it and accept income tax plus 10 percent on the earnings portion only.
What regular contributions become
The tax-free growth is the reason to start early. The table assumes a 6% yearly return compounded monthly, which is an assumption for illustration, not a forecast, and shows the balance after 5, 10 and 18 years of monthly contributions.
| Monthly contribution | After 5 years | After 10 years | After 18 years |
|---|---|---|---|
| $100 | $6,977 | $16,388 | $38,735 |
| $250 | $17,443 | $40,970 | $96,838 |
| $500 | $34,885 | $81,940 | $193,677 |
Of the $96,838 that $250 a month becomes in 18 years, $54,000 is contributions and $42,838 is earnings that are never taxed if spent on school. The compound interest calculator runs the same arithmetic for any amount and rate, and the savings goal calculator works backwards from a target and a date to the monthly deposit.
This guide reports the federal rules in IRS Topic 313 and Publication 970. States run the plans, and whether a state gives a tax break for contributions to its own plan is a state-by-state question; plan fees, investment options and maximum balances are set by each plan.
Frequently asked questions
What is a 529 plan?
A qualified tuition program under section 529 of the tax code: a savings or prepaid plan established and maintained by a state or a state agency, or by an eligible educational institution. IRS Topic 313 states the deal: contributions are not deductible federally, earnings accumulate tax free while in the account, and distributions are not taxable when used to pay qualified higher education expenses.
What can 529 money be used for?
Expenses required for enrollment or attendance at an eligible postsecondary school, which Publication 970 lists as tuition, fees, books, supplies and equipment, room and board for students enrolled at least half time within the school's cost of attendance, and computer equipment and internet access; fees, books, supplies and equipment for a registered apprenticeship; up to $20,000 a year of tuition at an elementary or secondary school for 2026, raised from $10,000; and up to $10,000 of principal or interest on the beneficiary's qualified student loans, a lifetime figure.
Is there an income limit or a contribution limit for a 529?
Publication 970 says there are no income restrictions on the individual contributors, and it sets no fixed federal dollar limit: contributions on behalf of a beneficiary cannot be more than the amount necessary to provide for that beneficiary's qualified education expenses, and each plan sets its own maximum account balance.
What happens if I take money out for something else?
The earnings part of the distribution becomes taxable income, and Publication 970 adds a 10 percent additional tax on the amount included in income. Contributions come back untaxed because they were never deducted. The 10 percent tax does not apply when the distribution is made because the beneficiary died or became disabled, received a tax-free scholarship or similar assistance up to that amount, attended a US military academy, or because the expenses were used for an education credit instead.
Can leftover 529 money go into a Roth IRA?
Within limits. Publication 970 describes a direct trustee-to-trustee rollover to a Roth IRA for the same beneficiary from an account open for more than 15 years, excluding contributions and earnings from the last five years, and counting against the beneficiary's annual IRA contribution limit. The account can also be rolled to another 529 or an ABLE account for the same beneficiary or a family member within 60 days, or simply left for a future student by changing the beneficiary.
Sources
- IRS Topic no. 313, Qualified tuition programs (a program established by a state or eligible institution; contributions not deductible; earnings accumulate tax free; distributions not taxable for qualified higher education expenses; apprenticeship expenses; elementary and secondary tuition limited to $20,000 a year, $10,000 before December 31, 2025; $10,000 lifetime for loan repayments; earnings of excess distributions taxable)
- IRS Publication 970, chapter 7 (qualified expenses including room and board limits and apprenticeship costs; the taxable part of a distribution; the 10 percent additional tax and its exceptions; rollovers within 60 days to another QTP or an ABLE account; the Roth IRA rollover conditions)