529 Plan
A state-sponsored account where growth used for qualified education expenses is untaxed.
Growth is untaxed and withdrawals for qualified expenses, meaning tuition, fees, books, and room and board for enrolled students, are untaxed federally. There is no federal deduction for contributing, though many states offer one against state income tax for residents using their own plan.
SECURE 2.0 addressed the long-standing objection to funding these heavily. From 2024, up to $35,000 of unused balance can be rolled into the beneficiary's Roth IRA over their lifetime, subject to the account having been open fifteen years and to annual IRA contribution limits. Beneficiaries can also be changed to another qualifying family member.
Withdrawals not used for qualified expenses are taxed on the earnings portion and carry a 10% penalty on that portion. Contributions come back out untaxed in any case, since they were never deducted federally.
Worked through
$300 a month from birth to 18
Monthly contributions over eighteen years, compounded at 7%.
- Monthly contribution
- $300
- Total contributed
- $64,800
- Growth at 7%
- $64,416
- Balance at 18
- $129,216
Growth is almost exactly half the balance, and untaxed when used for qualified expenses. Eighteen years is what makes the two halves equal.
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