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Investor Bulletin: 10 Questions to Consider Before Opening a 529 Account

Legislative Changes

Setting Every Community Up for Retirement Enhancement (SECURE) Act (2019) made some important changes to 529 plans. 

  • It allows 529 plan distributions of up to $10,000 to repay qualified student loans of the beneficiary. An additional $10,000 can be used for the qualified student loans of each of the beneficiary’s siblings. The $10,000 cap is a lifetime – not annual – limit.
  • It allows 529 plan distributions to pay for registered apprenticeship programs.

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to answer questions that may arise when investing in a 529 plan account. Please also see our companion Bulletin, An Introduction to 529 Plans, for background information on the plans.

1.  Who can use a 529 plan and what can it be used for?

A 529 plan can be used to save for certain educational expenses for any student in your family, including yourself. These educational expenses include college or other post-secondary education (qualified higher education expenses), as well as tuition for elementary or secondary public, private, or religious schools. The person who opens the 529 plan account is called the account holder or the saver. The person the account is opened for is called the beneficiary or the student. The account holder and the beneficiary can be the same person.

2.  When should I start saving in a 529 plan account?

You should consider saving as early as you can, but you should first take into account your family’s overall financial situation. Instead of saving for educational expenses, you may want or need to focus on other financial goals. You face penalties or could lose benefits if you do not use the money in a 529 account for qualified higher education expenses or tuition for elementary or secondary schools.

One of the benefits of 529 plans is the tax-free earnings that grow over a period of time. The longer the money is invested, the more time it has to grow and the greater your tax benefits. You will lose some of these potential benefits if you withdraw money from a 529 plan account within a short period of time after it is contributed.

3. Should I save through a 529 plan or are there other ways to save for an education? 

Investing in a 529 plan is only one of several ways to save for an education. Other tax-advantaged ways to save for an education include Coverdell education savings accounts, Uniform Gifts to Minors Act (UGMA) accounts, Uniform Transfers to Minors Act (UTMA) accounts, tax-exempt municipal securities, and savings bonds. Saving or investing for an education in a taxable account or with other types of investments are also options. Each option for saving for an education has advantages and disadvantages and may have a different impact on your student’s eligibility for financial aid and your tax situation. For additional information on tax implications, please consult a tax adviser.

4.  Should I invest in a 529 education savings plan or a 529 prepaid tuition plan?

In addition to traditional 529 education savings plans that allow savers to open investment accounts to save for an education, some states and a group of private colleges also offer 529 prepaid tuition plans. Prepaid tuition plans allow savers to purchase units or credits at participating colleges and universities for future tuition and mandatory fees at current prices. Both types of 529 plans offer tax benefits and have a similar impact on financial aid for post-secondary education.

Prepaid tuition plans usually have residency requirements, restrict where you can redeem the credits (usually public, in-state colleges and universities) and what the credits can cover (often tuition and mandatory fees only). Moreover, these plans do not allow you to prepay for tuition at elementary and secondary schools. If the student doesn’t attend a participating college or university, the prepaid tuition plan may pay less than if the beneficiary attended a participating college or university. It may only pay a small return on the original investment. When considering a prepaid tuition plan, you should understand the restrictions and limitations of the plan, including the extent to which your money is guaranteed and what happens to your money if the beneficiary doesn’t attend a participating college or university.

Education savings plans are typically more flexible. They usually don’t have residency requirements, offer different kinds of investment options, and can generally be used at any college or university for tuition, mandatory fees and room and board, as well as for tuition at elementary and secondary schools. But, as with any investment, education savings plans also expose your saved money to investment risk, including loss of principal.

Please see the Investor Bulletin, An Introduction to 529 Plans, for more information about the differences between education savings plans and prepaid tuition plans.

5.  If I choose a 529 education savings plan, which plan should I choose? 

You can invest in almost any state 529 education savings plan or even in multiple plans regardless of where you live. You should compare plans to determine which one(s) is right for your family, but a good place to start your research is your state’s plan. Many states offer tax incentives or other benefits for their residents. These benefits vary depending on the state and the 529 plan. In addition, state and federal laws that affect 529 plans could change.

You should consider what sort of incentives your state plan may offer, but you also should understand the fees charged, including those of the underlying investments. Sometimes, the tax incentives or other benefits that are offered to state residents do not outweigh the fees charged by the in-state plan. You should understand all of the limitations or restrictions of any plans you are considering. There may be reasons other than fees and residency benefits that make one plan more desirable for your family, such as investment choices or the ability to change the account holder or beneficiary.

6. If I have the option, should I go through a broker or open a 529 account directly?

Many states have both direct-sold and broker-sold 529 education savings plans available. If you already have a financial professional or you want someone who will help you with the process, you may consider opening an account in a broker-sold 529 plan. But, keep in mind that broker-sold plans often have additional fees. If you prefer not to use the services of a broker or are generally comfortable making your own investment decisions, you should consider opening an account directly with the state sponsor or program manager.

7.  How do I choose among the investment options in a 529 education savings plan?

Each education savings plan typically has a range of investment portfolio options, which generally include various underlying mutual funds and exchange-traded funds (ETFs) and a principal-protected bank product. These portfolios also may include static fund portfolios and age-based portfolios (sometimes called target-date portfolios). Typically age-based portfolios automatically shift over time to include more conservative investments as your student gets closer to college age.  You can allocate your money among several investment options or just one. When considering your options, you should think about the fees of each investment option (usually the lower the better, all things being equal), and the level of risk and potential investment return you want (both of which may depend on how long until your student will use the money).  If you plan to withdraw money from a 529 plan account within a short period of time after it is contributed (to pay for elementary or secondary school tuition, for example), you should be particularly careful about picking an investment option that meets your needs.

You should consider how often you want to review the investments and allocations, and potentially reallocate or change your options as your student gets older. Do you want to be in control of those changes or do you want it to happen automatically?  Current federal tax law allows you to change investment options up to twice a year or when you change the plan’s beneficiary. But if you want the change to happen automatically, you may want to consider an age-based portfolio. Be aware that age-based portfolios sometimes have higher fees. If you are using your 529 account to pay for elementary or secondary school tuition, you may have a shorter time horizon for your investment to grow. You may consider different investment options depending on when you plan to use the money that is invested.

8.  How should I fund the 529 account?

You should save money in your 529 account in a way that makes sense for your family. Many plans have a minimum initial deposit, often $250 or lower, and a minimum for subsequent deposits. Sometimes the minimum for subsequent deposits is lower if you set up an automatic investment plan, which may also help you stick to your savings goal. Keep in mind that states that offer tax benefits for contributions often limit the size of the annual contribution that is eligible for the tax benefit. Also, most plans have a lifetime limit on contributions.

9.  What do I do while my student is in school?

You should consider how you are going to withdraw and use the money from your student’s 529 account to fund his or her education. To begin with, consider whether you will use money in the 529 account to pay for elementary or secondary school tuition or save it for qualified higher education expenses. Before your student gets to college, you may need to consider how having money in your 529 account for future qualified higher education expenses might affect financial aid for your student’s elementary or secondary school tuition. Once your student has enrolled in college, you may want to consider, for example, what other types of financial aid your student is receiving, how you want to structure any loans during the years your student is in college, the impact using the 529 funds will have on subsequent years’ financial aid awards, and how much money you have available in the 529 account or in other savings vehicles.

Regardless of when you use the money, consider how you want to allocate your withdrawals among the investments if you have multiple investments. This is especially true if you have chosen different investment options for elementary or secondary tuition and for qualified higher education expenses. For example, you may want to redeem a certain investment first or make withdrawals proportionately among all your investments. Also, if your student is the beneficiary of multiple 529 plans, you should consider how you want to allocate your withdrawals among the plans.

If you can afford it, there may be benefits to continuing to contribute to the 529 account until your student completes college. You can continue to get any state income tax benefits on the contributions and tax free income on the investments. 

10.  What can I do if my student didn’t use all the money in the 529 account?

Some families may end up with money in a 529 account after their student is finished with school. If you use the money for purposes other than paying for qualified higher education expenses or tuition for elementary or secondary school, the earnings portion of any non-qualified withdrawals will be subject to federal income tax as well as a 10% penalty. Non-qualified withdrawals may also be subject to state income tax if you claimed a deduction or credit for your contributions. If your student received a scholarship, you can generally withdraw the money from a 529 account without a penalty, but you will still have to pay taxes on any income earned. You may be able to avoid paying any penalties and taxes if you change the beneficiary of the 529 account or transfer the assets to another 529 account, in both instances to a person in the same family. Or you could keep the savings in the 529 account if your student is considering graduate school. Make sure you understand the tax implications of investing in a 529 account and consider whether to consult a tax adviser.

Additional Information

You can find the offering circular for most 529 plans through the College Savings Plan Network website, which has a link for state 529 plans.

You can learn more about the mutual funds and ETFs that are investment options in an education savings plan by reading each product’s prospectus, statement of additional information, and semiannual and annual shareholder report, which are available in the SEC’s EDGAR Database.  The SEC’s Office of Investor Education and Advocacy also has a publication called Mutual Funds and ETFs – A Guide for Investors

You can read about the impact fees and expenses have on your investment portfolios in the SEC’s Office of Investor Education and Advocacy’s Investor Bulletin:  How Fees and Expenses Affect Your Investment Portfolio.

Consider using’s compound interest and savings goal calculators to assist you in determining how much money you will need to save or how to fund your account.

You can find information about investment advisers who manage the underlying mutual funds and ETFs or the 529 plans themselves at  You can also look up the brokers who sell 529 plans at

You can also find educational information about 529 plans on the Municipal Securities Rulemaking Board’s education center website.


The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities or tax law.

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