A 529 account is an excellent way to save for college and pay for education expenses. The name originates from Section 529 of the Internal Revenue Code, and they were originally created to help families save money for college and other types of education while enjoying certain tax benefits.
Congress recently expanded 529 plans to also allow them to be used to pay for K–12 education expenses and the tuition of apprenticeship programs. Later, 529 plans were expanded by Congress a second time so that they could be used to make student loan payments or have their funds transferred to a Roth IRA account for retirement savings.
As a versatile, accessible way for families to save for college without having to worry about hefty tax payments, a 529 account is a strong option to consider, and it’s worth taking the time to learn the different nuances and options offered by these types of accounts.
A 529 account is essentially an investment account that is specifically used for education expenses. Once funds are contributed to a 529 account, they are usually invested in a diversity of mutual funds and exchange-traded funds (ETF). From there, the money’s growth and earnings are tax-deferred, and an eventual funds withdrawal is tax-free as long as it is used for a qualified education expense.
Qualified education expenses generally include things like tuition, school fees, textbooks, room-and-board, student loan payments, school-related computers and Internet access, and special needs student equipment.
While qualified education expenses originally only applied to postsecondary education, up to $10,000 per year can now be applied to K–12 education expenses.
There are generally two different types of 529 accounts: 529 college savings accounts and 529 prepaid tuition accounts. The 529 college savings accounts are the most commonly available, while the prepaid tuition accounts are only offered in a limited number of states.
A 529 college savings account is the “default” type of 529 plan. With this type of account, monetary contributions are invested into mutual funds and ETFs, where they then accumulate tax-deferred earnings.
Tax-free withdrawals can then be used to pay for qualified education expenses, as well as up to $10,000 in student loan repayment. Beneficiaries are now also allowed to take up to $35,000 in unspent funds and roll them into a Roth IRA account for retirement saving, as long as the 529 account is at least fifteen years old.
Prepaid tuition accounts are only available in nine states: Mississippi, Florida, Texas, Massachusetts, Michigan, Nevada, Pennsylvania, Virginia, and Washington. These accounts can only be used for postsecondary education expenses (excluding room-and-board) and not K–12 education expenses.
The major benefit to prepaid tuition accounts is that they “lock in” the cost of tuition to the current rates (as the cost of tuition tends to increase over time). The downside to prepaid tuition accounts is that they lack the versatility of standard 529 college savings accounts, even limiting what colleges and universities the beneficiary can attend.
Whichever type of 529 account you choose, one of the biggest advantages of 529 plans is that all of the earnings accrued by the account are tax-deferred until a withdrawal is made—even if that withdrawal is years down the road.
The withdrawal itself will actually be tax-free so long as it’s used for a qualified education expense. However, if the funds from the 529 account are not used for qualified education expenses, the withdrawal will be subject to both state and federal taxes, and there will be a 10 percent penalty.
At the federal level, contributions made to a 529 account are not tax-deductible. However, at the state level, there are 38 states (including Washington, DC) that allow a tax deduction or credit for 529 contributions, with the exact amount varying from state to state. If offered, this deduction can only be taken if you invested in the 529 plan administered by the state you live in.
Finally, a contribution can be made to a 529 account that is equal to up to five years of the annual gift tax exclusion. As of 2025, this number is now $19,000 per year, meaning that a $95,000 contribution could be made to someone’s 529 account before gift tax would need to be paid on the amount. Importantly, this means that in the example above, five years would need to pass before an additional contribution could be made by that particular individual, otherwise gift tax would apply.
Understanding a 529 account goes beyond knowing how it works and its potential tax advantages—there are many other aspects to keep in mind:
A 529 account is an excellent way to save money for education expenses, whether for college, apprenticeships, or even K–12 education. Of course, a 529 account is a type of investment account, and it takes time for investments to earn money, especially when taking into account the ups and downs of the stock market over an extended period of time.
This means that the sooner you start saving through 529 investments, the greater the amount of tax-free money you can potentially save and put toward education expenses. While starting earlier is always better, it’s never too late to start saving money for education.
To learn more about your options for 529 accounts, contact Hancock Whitney. We can help you start working toward your education savings goal today.