A guide to 529 college savings plans (and when they’re worth it)

Raising college-bound kids comes with a lot of decisions and a lot of dollar signs. If you’ve been thinking about ways to pay for college, a 529 college savings plan might be on your radar. But how does it work? What can you use the money for? And is it worth it?

What is a 529 plan, and how does it work?

A 529 plan is a tax-advantaged investment account specifically built to help families save for education. Think of it as a dedicated college savings bucket with special tax perks to help your money grow faster.

You contribute money over time, and that money is invested. The goal is to watch it grow, and when it’s time to pay for school, you can withdraw it tax-free (as long as you use it for qualified education expenses).

Two types of 529 plans

There are two types of 529 plans you can choose from:

1. Education savings plans. This is the most common type. You invest money in mutual funds or similar options, and use the funds for future education costs.

2. Prepaid tuition plans. These let you prepay college costs at today’s prices, usually at in-state public schools. They don’t cover as many expenses as other 529 plans, but if you’re fairly certain about where your child will go, they can help you stay ahead of rising tuition.

What expenses are covered with a 529?

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You can use 529 funds tax-free for:

• College tuition and fees

• Room and board (for students enrolled at least half-time)

• Books, supplies, and tech like laptops

• K-12 tuition (up to $10,000 per year)

• Apprenticeship programs

• Student loan repayment (up to $10,000)

Contribution limits on a 529

There’s no federal cap on how much you can contribute to a 529 plan overall. However, the IRS does say you can’t exceed what’s “necessary” to cover the beneficiary’s qualified education expenses. 

Contributions are also treated as gifts for tax purposes. In 2025, you can give up to $19,000 per child (or $38,000 for married couples) without dipping into your lifetime gift tax exemption.

Some families choose to contribute larger amounts upfront, using a special IRS rule known as superfunding; however, for most, regular annual contributions are more common.

Pros of a 529 plan

Here are a few reasons families choose to save with a 529:

• Your savings can grow (tax-free!). As long as the money goes toward educational expenses like school tuition, books, or other qualified costs, you won’t owe taxes on the earnings.

• You can save more. Unlike some education accounts with strict caps, 529s allow for bigger contributions over time.

• You’re not locked into saving for one child. You can transfer the funds to another eligible family member if plans change.

• It usually won’t hurt financial aid. When owned by a parent, a 529 plan has a relatively small impact on your FAFSA calculations.

Cons of a 529 plan

A 529 isn’t one-size-fits-all, and there are a few things to keep in mind:

• You’ll incur penalties if you use it for anything other than its intended purpose. Spending the money on non-education costs means paying taxes on your earnings, plus a 10% penalty.

• The value can fluctuate. Since 529 plans are invested, your balance may fluctuate depending on the plan's performance.

• Some plans are better than others. Each state operates its own version, so factors such as fees, tax benefits, and investment options can vary significantly.

How do you open a 529 plan?

It’s not nearly as complicated as it sounds. Here’s how to get started with a 529 plan:

• Pick a plan. You’re not limited to your home state’s plan, so it's a good idea to compare a few. Look at fees, investment options, and whether your state offers any tax benefits for sticking local.

• Choose a beneficiary. This is usually your child, but you can change it later if needed. For example, if your child gets a scholarship or doesn’t end up using the funds.

• Select your investments. Most plans offer age-based portfolios that automatically adjust as your child approaches college age.

• Decide how you’ll contribute. You can start with a one-time deposit, set up recurring transfers, or both. Even small, regular contributions can grow over time.

Is a 529 plan worth it?

If college or another education plan is likely, a 529 can be a valuable part of financial planning. A 529 lets your savings grow tax-free, and you can contribute more than most other education accounts allow. You can even switch the beneficiary if plans change.

That said, if you’re not sure your child will attend college or a qualifying program, or you need access to the funds for non-education expenses, a 529 plan may not be right for your family.

How to save smart with Greenlight

A 529 plan is a great start, but it’s not the only way to help your kids build toward big goals. With Greenlight, families can build smart money habits every day, whether it’s saving for college, a first car, or just learning how to manage money wisely.

Here’s how Greenlight helps families save more, together:

• Set up direct deposit for easy paycheck management, even for teens with part-time jobs

• Approve money sent from friends and family using pay links

• Earn up to 6% savings rewards*

• Automatically round up purchases and send the spare change to savings

• Offer Parent-Paid Interest at a rate you choose, so your kids see how money grows over time

• Help kids and teens learn about investing early, with parent approval

And with flexible parental controls and real-time notifications, Greenlight makes it easy to guide your kids every step of the way. 

Teach money skills for life. From their first paycheck to saving for college, Greenlight helps families teach critical financial lessons. Try Greenlight, one month, risk-free.†

FAQs

Are there income limits for contributing to a 529 plan?

No. Anyone can contribute to a 529 plan regardless of income.

How much should I contribute each year?

It depends. Some families aim to contribute enough to cover a specific percentage of college costs, while others contribute what they can every month. But even $25/month adds up.

Can I choose any state's 529 plan, or do I have to use my home state's

plan?

You’re free to shop around for the best plan; however, some states offer tax breaks for in-state contributions.

What happens if my child doesn't go to college or doesn't use all the

funds?

You can transfer the 529 to another child or a qualified family member. If you decide to withdraw the money for something else, you’ll pay income taxes and a 10% penalty on the earnings (but not on the original contributions). Read more about what you can do with unused 529 funds.

Do 529 plan contributions affect financial aid eligibility?

If a parent owns the 529, it’s counted as a parental asset on the FAFSA, which means it might reduce the amount of need-based aid your child qualifies for. But the impact is often minimal.

*Greenlight Core families can earn 2% per annum, Greenlight Max families can earn 3% per annum, Greenlight Infinity families can earn 5% per annum, and Greenlight Family Shield families can earn 6% per annum on an average daily savings balance of up to $5,000 per family. To qualify, the Primary Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.