Saving for College 529 Plans

Saving for College: 529 Plans


Now more than ever, people need a college degree to obtain stable, well-paying jobs. At the same time, however, college continues to become more expensive. 529 plans provide a way for families to save money for college now and be better positioned to afford higher education in the future.


A 529 plan is a tax-advantaged investment plan designed to encourage families to save for future college expenses. The plans, named after Section 529 of the Internal Revenue Code, are operated by states, private sector partners and educational institutions. The two different types of 529 plans are prepaid tuition plans and college savings plans. Under both plans, funds grow income-tax free and, when withdrawn, are exempt from federal income taxes if used for qualifying higher education expenses. If withdrawn funds are not used for higher education expenses, they are subject to federal income taxes plus a 10 percent penalty on earnings.

Prepaid tuition plans allow families to buy tuition credits at today’s price to be used in the future. Since tuition prices are continually rising, prepaid tuition plans can be a good deal. The downside is that the plans offer little flexibility. Most state-operated plans require the funds to be used at instate public institutions. As an alternative, a consortium of private colleges offers a prepaid tuition plan. In either case, parents must predict where their child will want to attend college—and the student will need to be accepted at that institution.

The 529 college savings plans, which function similarly to 401(k) retirement plans, are a better option for families that want more flexibility. Families have a variety of investment options with the college savings plans, and the funds can be used at any college. Families are encouraged to invest aggressively early in the plan, then switch to conservative investments as the date of college enrollment approaches.

Quick Facts

  • Forty-nine states and the District of Columbia offer a 529 plan. Thirty-eight states offer only a college savings plan, one state offers only a prepaid tuition plan, and ten states offer both types of 529 plans. (See map below.)
  • Withdrawn funds used for college expenses are free from federal income taxes, and in some states, contributions also are eligible for state income tax breaks.
  • During the last 15 years, the amount invested in 529 plans has grown immensely. In 1999, families invested a total of $5.75 billion in 529 plans. By the end of 2013, the amount invested had increased to a record level of $227.07 billion according to the College Savings Plans Network.
  • Several factors affect the return on investment of a 529 savings plan including, the amount of time the investment has to compound, taxable family income, investment fees and sales expenses, and whether a state offers income tax credits or deductions for contributions.

Types of 529 Plans Offered in the States


Assets in 529 Plans Nationally ($ in billions)

State Income Tax Benefits

Table 1 illustrates the state tax benefits families can receive for contributing to 529 plans. Thirty-three states and Washington, D.C., offer a tax benefit, eight states do not offer tax benefits, and eight do not have state income taxes (New Hampshire and Tennessee do not have an income tax on wage income but do tax dividend and interest income). Most states permit out-of-state families to purchase its 529 plans, but the family likely will lose their state tax income benefit. If a family resides in Oklahoma, for example, but wishes to purchase the Utah 529 plan, they can do so, but they will not be able to claim a deduction on their Oklahoma taxes. Only Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania allow its residents to claim a state income tax deduction for contributions to other states’ 529 plans (known as tax reciprocity).

Financial advisors encourage families to consider not only the state tax benefits, but also plan fees when considering which 529 plan to use. This is due to the fact that, if fees are high, the costs may outweigh the possible benefits that can be earned from tax credits or deductions., a popular financial aid resource, notes, “If you have a longer term investing horizon, the plan with the lower fees is usually better despite not having a state income tax deduction. The value of the state income tax deduction is effectively amortized over the term of the investment, yielding a very small financial benefit per year.” In addition, it is important to evaluate the various plans offered within each state. Most states offer both direct-sold plans and adviser-sold plans; the direct-sold plans usually have lower fees.

Table 1. State 529 Tax Deductions and Credits


529 Deductions and Credits


$5,000 income tax deduction per taxpayer ($10,000 for married taxpayers filing joint returns)


No state income tax


$2,000 income tax deduction single or head of household; $4,000 joint filers (any state plan)


$5,000 income tax deduction for single tax filers ($10,000 joint tax filers)




Income tax deduction for full amount of contribution


$5,000 income tax deduction per single tax filer ($10,000 joint tax filers)




No state income tax


$2,000 income tax deduction per beneficiary




$4,000 income tax deduction for single tax filers/$8,000 joint tax filers


$10,000 income tax deduction per beneficiary for single tax filers; $20,000 joint tax filers


20% tax credit on contributions up to $5,000 ($1,000 maximum credit)


$3,098 income tax deduction per beneficiary per tax filer for contributions in 2014 (the amount is adjusted annually for inflation)


$3,000 deduction for single filers and $6,000 for joint filers per beneficiary for contributions to any state sponsored 529 plan




$2,400 deduction for single tax filers/$4,800 for joint tax filers per beneficiary; unlimited carry-forward of unused deduction into subsequent years


$250 tax deduction per beneficiary for taxpayers with incomes of $100,000 or less if a single filer and $200,000 or less for married joint filers or heads of household.


$2,500 per account per beneficiary; depending on the plan, contributions above $2,500 can be carried forward and deducted for up to the next 10 years for the savings plan or until the full amount of payments has been deducted for the prepaid plan.




$5,000 deduction for single tax filers and $10,000 for joint tax filers




$10,000 income tax deduction for single tax filers; $20,000 for joint tax filers


$8,000 tax deduction for single tax filers; $16,000 for joint tax filers


$3,000 income tax deduction for single tax filers; $6,000 for joint tax filers for contributions to any state sponsored 529 plan


$10,000 income tax deduction per tax return ($5,000 per year if married filing separately)


No state income tax

New Hampshire

No state income tax on wage income

New Jersey


New Mexico

Income tax deduction for full amount of contribution

New York

$5,000 income tax deduction for single tax filers and $10,000 for joint tax filers

North Carolina


North Dakota

$5,000 income tax deduction for single tax filers and $10,000 for joint tax filers


$2,000 income tax deduction per beneficiary, per calendar year for each contributor (or married couple); unlimited carry-forward in future years


$10,000 tax deduction for single tax filers; $20,000 for joint tax filers; five-year carry-forward of excess contributions


$2,120 tax deduction for single tax filers/$4,240 for joint tax filers; amounts are adjusted for inflation annually


$14,000 income tax deduction per beneficiary per taxpayer

Rhode Island

$500 income tax deduction for single tax filers/$1,000 for joint tax filers; contributions in excess of the annual limit can be carried forward and deducted in future years.

South Carolina

Income tax deduction for full amount of contribution, up to a maximum account balance limit of $370,000 per beneficiary

South Dakota

No state income tax


No state income tax on wage income


No state income tax


5% tax credit on contributions of up to $1,840 single; $3,680 joint per beneficiary (credit of $92 single tax filers/$184 joint filers)


10% nonrefundable tax credit on up to $2,500 in contributions per beneficiary (up to $250 tax credit per taxpayer per beneficiary)


$4,000 tax deduction per account per year (no limit age 70 and older), unlimited carry-forward of contributions until total amount has been deducted


No state income tax

West Virginia

Income tax deduction for the full amount of contribution with a five-year carry-forward of contribution amounts


$3,000 income tax deduction per beneficiary


Does not offer a state 529 plan

District of Columbia

$4,000 deduction from D.C. taxes each year (up to $8,000 for married couples filing jointly if each taxpayer owns an account). D.C. residents who exceed the annual contribution in a calendar year may carry forward and deduct the excess for up to 5 years.


Risks of 529 College Savings Plans

The 529 college savings plans operate like 401(k) plans, but researchers caution that a significant difference exists between saving for retirement and saving for college—namely time. A typical college savings plan will have an investment horizon of 18 years or less for traditional college students compared to retirement plans which often have horizons of more than 40 years. As a result, much of the success of 529 college savings plans is based on luck and timing.

Families with students in college during the Great Recession experienced the unlucky effects of a risky market. States where 529 college savings plans automatically shift assets into conservative investment accounts as children reach college age even were affected. In Maryland, North Carolina and Virginia, for example, 529 accounts lost up to 30 percent of their value in 2008 alone, which represented a significant loss for parents whose children were almost ready to attend college. In contrast, Florida’s 529 college savings plans more successfully shifted investments into conservative funds for families with high-school-age children, and those plans incurred no losses in 2008. The North Carolina state agency that oversees 529 plans commented that families can take the initiative to move their money into more conservative investments at any time. Although financial advisors note that such sharp economic downturns are rare, it is nonetheless important for families who are investing in 529 college savings plans to carefully consider how their state plan handles funds that are being invested as high school students near graduation.

In addition, it may be helpful for state legislators to understand how their state 529 college savings plans operate and to determine if there is room for improvement by requiring a review of the plans. The Virginia General Assembly, for example, passed the Virginia College Savings Plan Oversight Act in April 2012. The act requires the Joint Legislative Audit and Review Commission to continuously evaluate and oversee the state college savings plan. The commission will review the structure and governance of the Virginia 529 College Savings Plan; the structure of the investment portfolio; investment practices, policies and performance; and plan administration and management.

Risks of 529 Prepaid Tuition Plans

Although 529 Prepaid Tuition Plans do not rely on the volatile stock market, they do depend on the state operating the plan to remain solvent. Some state plans, however, such as those in Alabama, Colorado, Illinois and Texas, have endured serious shortfalls and have had to take actions to improve their situations.


In 2009 Alabama suspended new enrollment in its prepaid tuition plan when projections showed the plan would run out of funds by 2015. As a result, the Legislature passed a bill in 2010 to bail out the plan by directing $547.6 million toward it over 13 years. The legislation also reduced benefits in a way that limited the amount of return families initially were promised. In response, a group of parents sued the state. A settlement was ultimately reached where payments from the plan are to be made at rates for tuition and qualified fees for fall 2010. Students and their families are responsible for any tuition and fee payments above the 2010 levels.


In 2002, Colorado closed its prepaid plan to new investors giving existing participants a choice to either cash out at the current tuition value, or continue in the program but be subject to limitations on the plan’s total value. Then in 2013, Colorado completely closed its prepaid tuition plan and refunded the outstanding balance to remaining participants.


Illinois’ 529 prepaid tuition plan was about 28 percent underfunded in 2013. The Illinois Student Assistance Commission, which is responsible for the fund, ramped up recruitment efforts to enroll enough participants to make the plan solvent for the long-term.


Texas’ first prepaid tuition plan, which is constitutionally backed, stopped accepting new enrollees in 2003, but still has active participants who expect to use their plan to fund their college education. In 2008, Texas created a new prepaid tuition plan, the Texas Tuition Promise Fund, to replace the previous plan. The new plan places the risk on colleges and universities, not on the state. Public institutions must accept prepaid tuition credits even if the value of the credits is less than current tuition prices. Texas is the only state to structure their prepaid tuition plan in such a way.

529s Plans: Whom Do They Benefit?

Tax deductions tend to disproportionately benefit wealthier families. The value of a tax deduction is linked to the tax rate, so those paying higher taxes receive greater benefits from a deduction. One study found that, “for high-income households, the tax advantages of financing college expenses through 529 plans can amount to as much as a 39 percent advantage over traditional taxable savings accounts. For middle-income families, the advantage was 35 percent, but for low-income families, it was only 22 percent.” To create incentives for low- and middle-income families to participate in 529 plans, 12 states match contributions made to a savings plan. (See Table 2.)

Table 2. State Matching Grant Programs


Matching Grant


The Aspiring Scholars Matching Grant Program provides matching funds of up to $500 for up to five years. The program matches $2 for $1 of contributions for families with incomes less than $30,000 and $1 for $1 of contributions for families with incomes of $30,000 to $60,000.


Eligible lower- to middle-income families can receive a $1 for $1 grant up to $500, for up to five years for contributions they make to a CollegeInvest account.


The Florida Prepaid College Foundation provides college scholarships to low-income children. To fund these scholarships, the foundation receives an annual appropriation from the Florida Legislature and funding from community partners. The foundation may provide matching funds, or the partner may underwrite the entire scholarship.


Kansas residents with a household income lower than 200% of the federal poverty level ($47,100 for a family of four) can receive $1 for $1 matching funds when they contribute at least $100 to the state’s 529 savings plan. Families may receive up to $600 in matching funds each year.


Louisiana matches a portion of contributions to Student Tuition Assistance and Revenue Trust (START) savings accounts, based on the family income of the account owner and the category of the account. Matching amounts range from 2% to 14% of the contribution.


NextGen Matching Grant Programs are available for Maine accounts opened for new beneficiaries, regardless of family income. The Harold Alfond College Challenge Grant provides a one-time $500 grant to families who open a NextGen account before their baby’s first birthday. The NextGen Initial Matching Grant provides a one-time $200 Initial Matching Grant for Maine accounts opened with a minimum initial contribution of $25 of $50 depending on the investment plan. The  NextStep Matching Grant provides a 50% match on contributions, up to $100 per year, with a lifetime maximum amount of $1000, regardless of family income.


The MOST 529 Matching Grant Program is open to Missouri residents with an annual household income of $74,999 or less who own and contribute to a MOST 529 Plan account. Contributions made to a MOST 529 Plan account in 2014 may be matched dollar for dollar up to $500 (the match is dependent on the availability of program funds). Beneficiaries must be age 13 or younger when first applying for a MOST Grant.


The Silver State Matching Grant Program is open to Nevada residents with a Upromise College Fund 529 account. The beneficiary must be age 13 or younger when first approved for the matching grant. Contributions are matched $1 for $1 for families with adjusted gross income below 41,300, and are matched $1 for $2 for families with income between $41,301 and $61,950. The lifetime maximum award is $1,500.

North Dakota

The Bank of North Dakota provides matching grants to eligible North Dakota residents with a College SAVE account. The program matches up to $500 for singles earning $30,000 or less adjusted gross income (AGI), or $60,000 AGI or less if married, filing jointly. Account owners in this income group can apply for the match up to three years in a row. For account owners in a higher income bracket, the program offers a one-time match of up to $500 for singles earning $60,000 AGI or less, or $100,000 AGI or less if married, filing jointly. The account beneficiary must be age 15 or younger at the time of the matching grant application.


Under Section 54.7521, Texas Education Code and rules of the Board, the board has established the Texas Save and Match, which encourages lower-income Texas families to save for college tuition by providing matching contributions to existing prepaid tuition account holders in the Texas Tuition Promise Fund.


The Fast Forward Matching Program provides $1 for $1 matching funds for contributions made to the Utah Educational Savings Plan, up to $400 annually per beneficiary. Eligibility for the matching program is based on income level and age requirements.

West Virginia

Residents of West Virginia may be eligible to participate in the SMART529 Matching Grant Program, which provides a $1 for $1 match up to $500 annually (with a lifetime maximum of $2,500). Applicants must meet family income guidelines that are subject to the number of dependents, and the beneficiary must be age 12 or younger.


Legislative Actions

A wide range of actions is available to legislators concerning 529 plans, in addition to creating them in the first place. Legislators have a role in designing matching grant programs, such as the ones described above, and they can set state tax benefits for 529 plan contributions. Further, other legislative actions can provide incentives for families of all income levels to enroll in 529 plans and save for college. Some legislative actions to consider include the following.

  • Provide an option for taxpayers to deposit some or all of their state tax refund into a 529 plan. State examples include Arkansas (Act 211 of 2009), Maine (implemented through administrative order) and Utah (§59-10-1313). Arkansas’ statutory language reads:  “Arkansas Code §26-51-456(a)(1) The Revenue Division of the Department of Finance and Administration shall include on the Arkansas individual income tax forms, including those forms on which a husband and wife file separately on the same form, a designation as follows:  “If you are entitled to a refund, check if you wish to designate [ ] $25, [ ] $50, [ ] $100, [ ] _______ (write in amount) or [ ] all of your tax refund to an Arkansas Tax Deferred Tuition Savings Program account. Your refund will be reduced by this amount.”
  • Exempt 529 plans from “asset tests” used to determine eligibility for public assistance programs such as Temporary Assistance for Needy Families (TANF) or Medicaid. State examples include Arkansas (Act 587 of 2007), California (Assembly Bill 1078 of 2007), Colorado (Senate Bill 134 of 2006) and Oklahoma (Senate Bill 1390 of 2008). Oklahoma’s legislation stated: “An Oklahoma College Savings Plan account shall be exempt for purposes of determining eligibility for public assistance, provided that the federal rules for these programs permit such an exemption.”
  • Exclude 529 plan assets from state financial aid considerations. At least 17 states preclude assets held in 529 plans from counting against a student’s eligibility for state need-based financial aid. State examples include Indiana (§21-9-7-2, 2009) and Rhode Island (§16-57-6.6, 2009). Sample language from Rhode Island statutes provides that: “No moneys invested in the tuition savings program shall be considered to be an asset for purposes of determining an individual’s eligibility for a need based grant, need based scholarship or need based work opportunity offered by the state.”
  • Provide tax breaks to employers that match employee contributions to 529 plans. According to a Gallup poll, Low-income families cite employer matches as one of the strongest incentives to start saving for college. State examples include Illinois (Act 096-0198 of 2009) and Utah (§59-7-106, 2009).


Although most states offer a 529 prepaid tuition or college savings plan, these may differ in terms of investment strategy, fees, and state tax benefits. This brief elucidates some of the differences and offers strategies for legislators to improve and strengthen their state 529 plans. With a college degree becoming both more valuable and more expensive, state 529 plans can be a smart state strategy to help families save for college.

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