Earnings on 529 investments accumulate tax-free, and distributions are tax-exempt, as long as they are applied toward eligible education expenses such as tuition and room and board.

529 plans are named for the section of the federal tax code that governs them. They are most often sponsored by individual states and managed by a financial services company. The investments underlying a 529 plan typically consist of mutual funds.

Important points about 529 plans:

• Distributions must be used for qualified higher education expenses (tuition, fees, room, board, books, equipment and supplies) at any eligible educational institution nationwide including colleges, universities, graduate schools and trade schools. Other qualified expenses include:

  • K-12 tuition expenses up to $10,000 per year*
  • Repayment of qualified student loans or a maximum lifetime limit of up to $10,000. This includes amounts of repaid principal and interest on any qualified student loan of either a 529 plan designated beneficiary or a sibling of the designated beneficiary.**
  • Apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act. Includes expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in a program.**
• Anyone who has reached the age of majority, as specified by their state of residence, may open an account and anyone may contribute to a beneficiary's account (grandparents, aunts, uncles, friends.)
• Account maximums are typically high enough to cover qualified undergraduate, graduate and professional education expenses.
• Account owners may change a beneficiary to another eligible family member or to themselves if the beneficiary does not continue with higher education.
• Distributions must be used for qualified higher education expenses (tuition, fees, room, board, books, equipment and supplies) at any eligible educational institution nationwide including colleges, universities, graduate schools and trade schools. Additionally, as a result of the tax bill signed in December 2017, K-12 tuition expenses up to $10,000 per year are also considered qualified expenses for federal tax purposes.
• Non-qualified withdrawals are taxable as ordinary income to the extent of earnings and may also be subject to a 10% federal income tax penalty. Such withdrawals may have state income tax implications.
• No penalties are imposed for withdrawals in the amount of scholarships the beneficiary is granted.
• Tax-free transfers between investment options are allowed twice per calendar year.
• Investment returns are not guaranteed, and you could lose money by investing in a 529 plan.