With the cost of going to college steadily rising, it is never too early to start saving for your child’s education. One of the best ways to do that is with a 529 plan.

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If you are like many therapists and wellness practitioners, you know what it’s like to carry student loan debt. A college savings plan helps to ensure your child won’t need to rely on student loans to pay for their education—or that, if they do require loans, they will need to borrow less money than they would otherwise.

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A 529 plan also benefits you as a contributor. Your contributions are tax-deferred and often even tax-free. You lower your tax bill in the present, while building financial security for your child’s future.

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While this article focuses on 529 plans, there are other options to take into account before deciding which college savings plan to use. Here’s what you need to know. 

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What is a 529 plan?

A 529 plan is a tax-deferred savings account, similar to a traditional IRA. Money you contribute to a 529 is not subject to federal taxes at the time you contribute it. Rather, it is taxed when the money is withdrawn.

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You may still need to pay state taxes on contributions. This varies from state-to-state. Some states allow you to deduct contributions to 529 plans from your taxes.

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Best of all, you likely will not need to pay any taxes on contributions. If the money is withdrawn to pay for qualified education expenses, the funds are exempt from state and federal taxes.

Who can contribute to a 529 plan?

A 529 plan has only one beneficiary—the future student who will eventually withdraw the funds. But multiple individuals can make contributions.

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All 529 plans allow third-party contributions, meaning that anybody can contribute, not just the beneficiary’s parents. That means grandparents, godparents, aunts, uncles, and even friends of the family can make contributions.

Contribution limits for 529 plans

Contribution limits for 529 plans vary from state to state, ranging from $235,000 (Georgia) to $520,000 (New York). These are aggregate contribution limits—the total amount that may be contributed to the plan.

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Contribution limits change occasionally, but not on a recurring annual basis as with some retirement accounts.

How are 529 plans invested?

The portfolio of a 529 plan typically consists of a limited selection of mutual funds. You can choose how your money is invested when you make contributions. The funds you choose will affect the performance of the plan.

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Many 529 plans offer target-date funds. These funds adjust the assets they hold as the beneficiary approaches the age at which they will make withdrawals to cover education expenses. The investments become more conservative as time goes by. 

Alternatives to a 529 plan

While 529 plans are popular and offer many benefits, they are not your only option when it comes to college savings funds. 

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Other options, which may be used as alternatives or supplements to a 529 plan, include:

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• Brokerage accounts. A traditional investing account, the funds withdrawn from a brokerage account are not limited to being spent on education. You have full control of the account and may choose your own investments. However, a brokerage account does not offer tax advantages like a 529 plan.

• Uniform Gift to Minors Act (UGMA) account or Uniform Transfer to Minors Act (UTMA) account. Funds contributed to a UGMA or UTMA account are distributed to the beneficiary once the beneficiary reaches a certain age (18 to 25 years, depending on your state). These funds are typically taxed upon distribution at the beneficiary’s rate, which can result in overall tax savings. But so-called “kiddie tax” rules prevent the beneficiary from withdrawing 100% of the funds at their own tax rate; a large portion may be taxed at the contributor’s rate.

• Coverdell Education Savings Accounts (ESAs). An ESA operates similarly to a 529 plan, with similar benefits. But the contribution limit is just $2,000 annually, and higher-income earners are not eligible to open ESAs. 

What can a 529 plan be used for?

So long as they are used to pay for qualified education expenses, the funds in a 529 plan are tax exempt.

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These qualified expenses include:

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• Tuition and fees for college, graduate, or vocational school
• Student room and board
• Books, course materials, and school supplies
• Student loan payments (up to $10,000)
• Computers, internet, software, and other technology used for schoolwork
• Special needs and accessibility equipment

Paying for K – 12 education with a 529 plan

In addition to paying for college, the funds in a 529 can be used to pay for K – 12 tuition and fees. These fees count as qualified expenses, so they are tax exempt.

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However, the total limit on spending is $10,000. Anything above this does not qualify for a tax exemption.

Transferring a 529 plan

The funds in one 529 plan may be transferred to another 529 plan. This is helpful if you have multiple children and one of them receives a scholarship.

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Federal tax laws place limits on this transfer. Funds may only be transferred once per year, and the recipient must be a family member.

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Otherwise, you have the option of changing the beneficiary of a fund. Typically you do not need to change plans or open a new account in order to change the beneficiary. 

Roth IRA rollovers

Thanks to the 2022 SECURE Act, some of the funds in a 529 may be rolled over into a Roth IRA. The 529 account must be at least 15 years old to qualify, and the limit is $35,000 in unspent funds.

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Benefits and drawbacks of a 529 plan

Like any other financial tool, 529 plans have both their benefits and their drawbacks. 

529 plan benefits

• High contribution limit. You can contribute considerably more to a 529 than to an ESA.

• Tax deferral. Making contributions to a 529 plan lowers your overall tax burden in the year you make the contribution.

• Tax-free withdrawals. Provided the funds are spent on qualified expenses, withdrawals from 529 plans are tax exempt.

• State tax deductions. Some states allow you to deduct 529 contributions from your state taxes, further reducing your tax burden.

• Flexible contributions. You can make contributions to a 529 when it is most convenient for you to do so. This can be helpful if, like many therapy and wellness practitioners, you have variable income. During a slow year, you may choose not to make any contributions. During a higher-income year, you can make higher contributions in order to offset your tax burden.

• Simplicity. Many financial institutions allow you to open and manage a 529 plan online, without lengthy application processes.

• Location flexibility. You are not limited to opening a 529 plan in the state where you reside. You can choose which plan works best for you regardless of the state where the plan is based. That being said, read the fine print of any plan you are considering to make sure it does not have state residency requirements.

529 plan drawbacks

• Limited spending options. If the beneficiary of a 529 plan decides to spend the funds on non-qualified expenses, you won’t enjoy the benefit of tax exempt withdrawals.

• Fees vary. The fees for opening a 529 vary from state to state, from $0 to $25. Funds in the account may also charge management fees, and you might need to choose low-fee mutual funds in order to avoid them. 

• Limited investment options. Compared to a brokerage account, a 529 offers a small selection of mutual funds from which to choose.

• Restrictions on switching investments. Depending on the details of your 529 plan, you may be limited in your ability to change investments.

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College savings vs. prepaid tuition plans

There are two types of 529 plans: college savings plans and prepaid tuition plans.

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College savings plans are the most popular and common of the two, but it’s important to understand the difference.

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Contributions to a college savings plan are invested in mutual funds. When they are withdrawn, the beneficiary can use these funds to pay for a range of education-related expenses, including tuition and fees for any US college and, depending on the plan, a limited selection of international colleges.

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Contributions to a prepaid tuition plan are used to purchase college credits. These credits may be used only at a selection of colleges specified by the plan.

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The benefit of a prepaid tuition plan is that you are able to “lock in” college tuition at current fees, rather than their fees when the beneficiary withdraws their funds. However, contributions may be spent only on tuition, not on other education fees, and limits on other spending—such as on K – 12 tuition—typically apply. Prepaid tuition plans are only available in some states. 

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Gift tax and 529 plan contributions

The IRS charges gift tax on transfers of funds you make to individuals for which you receive little or nothing in return. 

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The good news is that, unless you plan to transfer millions of dollars in gifts during your lifetime, you will not need to pay gift tax. Annual and lifetime gift tax exclusions allow you to transfer funds without having to report the gifts or pay taxes on them.

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However, you may still need to report the gifts by filing Form 709 as part of your tax return.

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You have both an annual and a lifetime gift tax exemption. Your annual exemption is the total amount you may give to one individual without being required to report the gift to the IRS and without the funds counting towards your lifetime limit. 

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Your lifetime limit is the total amount in excess of your annual limit that you may give away during your lifetime before you have to start paying gift tax.

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As of 2025, the annual gift tax exemption for single filers was $19,000, and the lifetime exemption was $13.99 million. 

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The annual exemption is calculated on a per-recipient basis. For example, you could give $19,000 to one person, $19,000 to another, and $19,000 to a third, without being required to report the gifts with Form 709 or having them count against your lifetime exemption.

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However, suppose that in 2025 you contributed $24,000 to your child’s 509 plan. You would need to report the gift when you file your taxes, using Form 709 to do so. And the $5,000 you gave away in excess of the $19,000 annual limit would count towards your lifetime limit of $13.99 million.

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Even if you never have to pay gift tax, it’s important to keep up to date with the latest annual limits, especially if you are making regular, sizable contributions to a 529 plan. That way you know when you need to report your contributions as gifts and when you do not. 

The gift tax lump sum exclusion

An individual can give a single, large gift to someone else without triggering gift tax consequences. In the context of 529 plans, this is helpful if a grandparent wants to make a contribution from their retirement savings.

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In that case, they are allowed to give five times their annual exemption amount as a one-time gift. For instance, in 2025, a grandparent could contribute $95,000 to their grandchild’s 529 plan without any of it counting towards their lifetime gift tax exemption.

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This rule only applies to one-time gifts and not to recurring contributions.

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How to choose a 529 plan

Each 529 plan is managed by a US state, and typically administered through a specific financial institution. Since you often do not need to reside in a state in order to open a plan there, it pays to take the time and comparison shop between different plans to find the one with the most favorable terms. 

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You can do this easily with the 529 search and comparison tool, which is managed by the National Association of State Treasurers.

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As you browse and compare 529 plans, take these factors into account:

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• Direct-sold vs. advisor-sold. You are free to open a direct-sold plan on your own, while an advisor-sold plan must be purchased through an advisor. An advisor may charge extra fees.

• State residency requirements. Some plans require you to reside in the state where you are opening the plan.

• Fees. Fees vary from one plan to the next. In addition to fees for opening accounts, you may need to pay management fees for mutual funds.

• Maximum contributions. Determine how much you would like to save in a 529 plan before making your choice. Contribution limits vary.

• State tax deductions. If your state offers tax deductions for 529 contributions, make sure the plan you choose qualifies.

Key takeaways

• Contributions to 529 plans are tax-deferred, and tax exempt if the funds are withdrawn to pay for qualified education expenses

• A 529 plan has only one beneficiary, but may have any number of contributors

• 529 plans vary from state to state, but you have the option of purchasing a plan outside the state where you live

• Keep track of your annual gift tax exclusion—it determines whether you need to report contributions to a 529 plan on your tax return

• Take your time comparing different 529 plans before choosing the one that’s right for you

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Saving for a 529 plan? Check out our complete budgeting guide for therapists.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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Bryce Warnes is a West Coast writer specializing in small business finances.

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