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529 plans are a useful tool for families looking to fund a child’s college education while minimizing taxes. With generous total contribution limits, no restrictions based on income and even options for changing beneficiaries, they can also play a role in estate planning.

The strategic use of 529 plans can help you preserve capital while supporting future generations’ education goals. Let’s look at how these state-sponsored savings accounts work.

Section 529 of the U.S. tax code provides a way for states to set up tax-advantaged “qualified tuition programs,” which have come to be called 529 plans. These come in two varieties: savings plans, which are investment accounts, and prepaid tuition plans, which allow you to purchase credit hours now to be redeemed later.

The education savings plan is by far the most common type of 529 plan. Despite the name, it differs quite a bit from a traditional savings account. Though you can keep cash or short-term investments in an education savings plan, it’s meant to hold a portfolio of equity and fixed income assets that may automatically adjust based on the beneficiary’s age or time until college enrollment. An education savings plan typically charges fees and is not FDIC-insured, though in some states you may be able to hold assets like certificates of deposit, which are FDIC-insured.

You don’t have to use your own state’s 529 education savings plan, though some states offer tax advantages for residents who contribute to the state plan. Also, you can use 529 assets to pay for schools outside of your state or the student’s state. And each state sets its own maximum account size.

529 prepaid tuition plans, by contrast, allow you to pay for a child’s future tuition (but not other education expenses) at today’s costs. These plans typically charge fees and require families to commit to a specific school or group of schools, which may make them impractical as students’ interests evolve.

One of the major benefits of a 529 savings account is the fact that any investment growth in the account is tax-deferred at the federal and state levels. Withdrawals are tax-free as long as they are used for the beneficiary’s qualified education expenses. Depending on the state you live in, your contributions may also entitle you to deductions or credits on your state return.

With a 529 savings account, many basic investment guidelines apply. Starting early and considering each investment’s risk-return profile and the impact of fees can help you maximize potential returns.

However, you don’t always have many choices about how to invest your 529, as each state sets its own rules on which investments are allowed. In many states, participants are limited to an approved list of well-diversified mutual funds. And for all 529 plans, you can only change investments twice in a calendar year.

Anyone can contribute to a 529 plan, including parents, grandparents, friends of the family and the beneficiary. Any contributions you make are excluded from your taxable estate (unless you are both the account owner and the beneficiary). That can make 529 plans an effective gifting and estate planning tool.

Annual contributions over the annual gift tax exclusion ($19,000 for individuals in 2025) may incur a federal gift tax. However, you can contribute five years’ worth of gifts ($95,000 for individuals in 2025) in a single year without incurring the tax, as long as you “count” the gift as occurring over five years for tax purposes.

If the combination of contributions and investment growth means the account reaches the state maximum, you can open another 529 account for the same beneficiary in a different state.

When it comes to withdrawals, it’s important to know what counts as a “qualified education expense.” Qualified education expenses typically include tuition, mandatory fees, books, supplies and equipment required for enrollment or attendance at a college, graduate school or vocational school.

Room and board costs, K-12 tuition and student loan repayment may also qualify, but are subject to certain limits. Withdrawals for any other expenses are subject to a 10% penalty and income tax on earnings. If the original beneficiary doesn’t end up needing the funds, all is not lost. The account owner can name an eligible family member as a new beneficiary at any time without tax or penalty.

A college education can help give your children, grandchildren and any other young family members a head start on their future success. Discuss your options for funding your family’s education with a �۶���Ƶ Financial Advisor or branch office near you.