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Knowledge Hub / A 529 Plan Can Be Used for These Expenses Without Penalty
A 529 Plan Can Be Used for These Expenses Without Penalty

A 529 Plan Can Be Used for These Expenses Without Penalty

Paying for College
ELFI | June 24, 2024
A 529 Plan Can Be Used for These Expenses Without Penalty


Despite the rising price of a bachelor’s degree, parents and families still believe a college education is key to a successful career and comfortable life. And the data supports that mindset; the Association of Public & Land Grant Universities (APLU) reported that the annual median earnings for those with college degrees is 67% higher than the earnings of those with high school diplomas. 

A 529 college savings plan can be a valuable tool for families looking to help their children with the cost of a college degree. However, some people put off opening an account because they have questions like, “What can a 529 be used for?” or “Does a 529 plan affect financial aid?” 

Continue reading to learn the ins and outs of these important tools.

What Is a 529 College Savings Plan?

When it comes to saving for higher education, 529 college savings plans are popular tools. According to the College Savings Plans Network (CSPN), there were over 16 million 529 savings accounts open as of the end of 2023, with over $450 billion in assets saved. 

But what is a 529 college saving plan, and why are they so useful? To understand how they work, the first thing to know is that there are two main types:

Prepaid Tuition Plan

A prepaid tuition plan is available in most states. With this version of 529 plans, you purchase credits or units at participating colleges at today’s rates, and the child can use them to pay for their education in the future. 

Education Savings Plan

A 529 education savings plan, also known as a qualified tuition plan, is the better-known of the two options; it’s an investment account that allows family members to contribute money with the goal of growing it over time to pay for the education of a designated beneficiary — usually a child or grandchild — education. By investing in mutual funds, exchange-traded funds (ETFs) or bonds, the 529 plan can grow tax-free, and withdrawals for eligible education-related expenses are free from income taxes. 

What Can a 529 Plan Be Used For?

The CSPN reported that families saved an average of $27,741 in their 529 accounts. That’s a substantial amount of money, but, due to the rules governing these accounts, the money can only be used for certain expenses without incurring costly penalties and taxes.

Eligible expenses include: 

In addition to college-related expenses, families can withdraw up to $10,000 to pay for private elementary or secondary school tuition.

What Expenses Are Not Qualified Under a 529 Plan?

Although 529 college plans can pay for a broad range of expenses, there are some restrictions. Non-qualifying expenses include: 

Withdrawals used for non-eligible expenses are taxable as income. And, you’ll incur an added 10% penalty. 

Frequently Asked Questions About 529 Plans

1. What happens to a 529 plan if my child doesn’t go to college?

If the selected beneficiary decides against going to college, there are a few options for the money in the account: 

2. Does a 529 plan affect financial aid?

The assets in a 529 plan are considered in the federal student aid formulas. However, 529 plans are considered parental assets, so the maximum rate is 5.6%, meaning only 5.6% of the 529 account balance is included in the calculation. That’s quite different from student assets, which are calculated at a maximum rate of 20%. 

3. Am I eligible for a tax credit or deduction for contributing to a 529 plan? 

Contributions to 529 plans aren’t eligible for federal tax credits or deductions, but you might qualify for special tax benefits at the state level. 

For example, the following states offer tax benefits for contributing to a 529 plan: 

Morningstar, an investment research company, maintains a list of available state tax deductions and credits.