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Why choose a 529 savings plan?

No matter what state’s plan you sign up for, a 529 savings plan is a smart choice.

Parents and grandparents typically open 529 savings plans, but plans are available to anyone who’d like to start saving for a child’s education. You can open your own account, or you can choose to contribute to someone else’s plan.

As long as the child has been born and has a social security number, you can start saving immediately. Services like Upromise and Ugift make it easy for anyone to contribute to your 529 savings plan—grandparents, aunts, uncles, family friends, and more.

Your investment in a 529 plan is free from federal income tax. Withdrawals are free from federal taxes if you use the money you withdraw for qualified higher education expenses.

Some states let you deduct contributions to a college savings plan from your state income taxes if you’re a resident of the state that manages your plan. And if you’re an Indiana resident, Indiana’s plan gives you a significant tax credit.

There are no income limits for 529 savings plans, meaning no matter your salary, you can start saving for college.

You can change beneficiaries at any time, meaning if one child doesn’t go to college or doesn’t use all the money in the account, you can designate another child who can take advantage of your savings.

You can use your savings for any college, university, graduate school, trade school, or technical school that is accredited in the United States and is eligible to participate in federal financial aid programs.

If your child gets a full-ride scholarship, you can withdraw the same amount without paying a penalty. It’s a win-win situation.

How savings can affect financial aid

Keep in mind that how a college savings plan is reported on a student’s Free Application for Federal Student Aid (FAFSA) may affect the amount of financial aid they can receive:

  • If your child is a dependent and you own the account, the potential effect on your student’s financial aid eligibility is relatively low.
  • If your child is not a dependent and is the account owner, the effect on their financial aid eligibility could be somewhat higher.
  • If a third party, such as a grandparent, owns the account, there could be an effect on the student’s financial aid eligibility since this account would not be reported as either a parent or student asset on the FAFSA.

Nonfederal financial aid programs may vary in their guidelines for how 529 funds are treated. Check with a financial aid officer or the institution offering a particular program for details.

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