A 529 college savings plan can be a powerful tool when saving for future education expenses because investments in the plan can increase tax-free. In this guide, you’ll find what you need to know about 529 savings plan options and how to choose a plan and start saving.

We’ll also answer frequently asked questions about 529 college savings plans and provide excerpts from our annual list of 529 plan ratings to help you find the best option for your situation.

What Is a 529 Plan?

Let’s look at the basics of a 529 plan. A 529 college savings plan is an investment vehicle that allows for a tax-advantaged way to pay for education costs.

With a 529 plan, you contribute aftertax dollars into an account in which you can choose from a number of investment options, such as equity funds, bond funds, or a portfolio that gradually derisks over your investment period. When the time comes, you can withdraw money tax-free (meaning you don’t have to pay capital gains taxes), to cover qualified educational expenses like tuition, fees, books, a computer, and room and board. 529 accountholders can request a withdrawal to pay an educational institution or to reimburse themselves for a beneficiary’s qualified education expenses.

You can also use a 529 plan to pay for graduate school, trade school, and, in some states, even K-12 private education.

The Basics of 529 College Savings Plans

How Does a 529 Plan Work?

Anyone can open a 529 plan and name a beneficiary. Typically, it’s the parents who open a 529 plan for their child, but anyone can open one as long as there is a beneficiary who’s planning to go to school. You can even name yourself as a beneficiary if you’re planning on having a child and want to get a head start in saving for their education.

If a beneficiary no longer needs the money in the account (by deciding not to go to school or by earning a scholarship, for example), the 529 account owner can name a new qualified beneficiary without incurring federal or state income tax penalties. Qualified beneficiaries are members of the current beneficiary’s family, which includes siblings, children, nieces and nephews, their spouses, or a first cousin. In addition, beneficiaries with an account open for 15 years or more can transfer unused funds to their Roth IRA .

Most 529 plans don’t have contribution limits, but putting money into a 529 account is considered a gift. So, 529 contributions are subject to the annual gift tax exclusion. If you go over the gift tax exclusion limit in a given year, any extra 529 contributions get counted against your lifetime gift tax exemption.

Unlike brokerage accounts, 529 plans generally do not provide the ability to purchase individual stocks. In fact, families cannot take an active or trading approach to these 529 accounts, as investment changes are only allowed twice a calendar year. Contributions into the account are also invested in your preselected investment option once the check or bank transfer clears. It usually is not possible to deposit the money into a cash account and then decide when to invest. You can read more about the investment options in 529 plans later in this article.

How Do I Choose a 529 Plan?

Step 1: Evaluate your state tax benefit.

A majority of states offer a state income tax benefit if you invest in your state-sponsored plan. Depending on how much you contribute, your income level, and how generous the state income tax benefit is (some states have relatively low limits on how much of your contribution you can deduct), you may want to select your state’s plan, even if it is not highly rated, or carries slightly higher fees.

Since every family’s situation is different, it may help to consult a tax specialist to determine the value of this benefit.

Step 2: Use Morningstar to compare plans.

What Are the Best 529 Plans?

In our Morningstar 529 reports , we highlight the pros and cons of each 529 plan’s investment options. This includes an assessment of the asset manager or investment advisor (such as Vanguard , TIAA-CREF, or Wilshire ), the asset-allocation process, and the quality of the funds available in each 529 plan.

You’ll notice that we break down how many age-based plan options they provide compared with static plan options. Like target-date funds , age-based plans are geared toward investors who prefer a hands-off approach. Static plans allow investors to be more involved and find plans that align with their respective risk levels.

The following Gold-rated plans are the five we’ve assessed to be the best 529 plans available.

Source: Morningstar. Data as of Oct. 29, 2024.

Utah’s my529 Plan

Utah’s my529 plan is the only 529 plan that’s consistently received a Gold rating since we debuted our ratings in 2012. This plan features a straightforward well-designed target-enrollment series and a unique custom option that allows investors to build their own glide paths using Vanguard and DFA funds. State oversight continues to be topnotch with a well-resourced and experienced investment team that draws upon a network of experts in the asset-management industry.

Alaska’s T. Rowe Price College Savings Plan

Alaska’s T. Rowe Price College Savings Plan has a competent and well-resourced team at T. Rowe Price that manages its portfolios. The plan offers a comprehensive menu that retail investors can easily navigate.

Pennsylvania 529 Investment Plan

The second incumbent Gold-rated plan, the Pennsylvania 529 Investment Plan , continues to benefit from its topnotch state oversight. The Pennsylvania Treasury Department has built an impressive record of effective governance, including a successful negotiation with its investment manager and program manager that will lead to accelerated fee reductions as the plan’s assets increase.

Massachusetts’ U.Fund College Investing Plan

Massachusetts’ U.Fund College Investing Plan benefits from the skills and resources of a portfolio management team at Fidelity . The state of Massachusetts advocates for its investors, and the plan offers a comprehensive menu that aligns with investors' best interests.

Illinois' Bright Start Direct-Sold College Savings

Illinois’ Bright Start Direct-Sold College Savings Plan offers compelling investment options that are also highly cost-effective. Notably, the state offers a wide range of high-quality investment options across multiple firms, compared with some peers whose offerings are restricted to a single asset manager.

What Are My Investment Options in a 529 Account?

While 529 plan offerings differ from state to state, the basic structure is similar. All plans provide an age-based or target-enrollment series, which are set-it-and-leave-it investment options that gradually derisk during the accumulation and savings period. These options can serve as a default choice for most investors, similar to a target-date fund for retirement savers.

For investors who want to select their own investments, 529 plans also offer a menu of mutual funds (typically one or two dozen), such as a 60/40 balanced fund, an S&P 500 index fund, or more specialized funds such as value, growth, or small-cap funds. Plans also provide an FDIC-insured account or a stable-value account as their least risky option.

What Are the Tax Benefits of 529 Plans?

Part of what makes 529 plans such effective options for savings is the mix of tax benefits that they can offer to investors. A combination of federal and state-level tax breaks, deductions, and credits are all available, depending on where you live.

The variety of options can make the process of selecting a 529 plan feel overwhelming, but there are resources available to determine what you may be eligible for.

Do 529 Plans Charge a Lot of Additional Fees?

In addition to the fund expense ratios, 529 investments do carry additional fees , such as program management fees and state fees. (Plans sold through an advisor will also have marketing and distribution fees.)

Anything in the range of 0.01% to 0.10% would be considered a lower fee. Additional fees of over 0.20% (for a direct-sold plan) would be relatively unattractive. Although less common now, plans may also charge enrollment fees, account fees, or statement fees.

Quick Tips About 529 College Savings Plans

Here are some takeaways about 529 plans that can benefit both new and veteran investors who are looking to take full advantage of their offerings.