529 savings plans explained: Pros, cons & what to know before you invest

For many parents, one pathway to helping their children succeed is through education; however, the price of college has seen consistent upward ticks.

Today, the average cost of a four-year degree at an in-state public college is over $11,500 per year while a four-year private program averages over $43,000 per year (tuition and fees). And while recent debt relief efforts have helped some students and graduates chip away at their loan balances, it can be hard to know what resources the future may hold.

Higher education costs can complicate your family budget, especially as you balance other financial obligations like bills and saving for retirement. A 529 plan is one tool that can help you plan for educational expenses over the long term. Find out how they work and whether a 529 might be right for you.

A 529 is a state-sponsored investment plan with tax advantages that can help you save money for educational costs. Savings in the plan grow tax-deferred. As long as withdrawals are used to pay for qualifying educational expenses, they're tax-free.

Originally, 529 plans were used to save for higher education, but the program has expanded to include educational costs for K-12, post-secondary credentials and apprenticeship programs. You can use 529 funds to cover qualifying expenses such as books, tutoring, educational therapies for students with disabilities and test fees.

With the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025, Congress has increased the K-12 expense withdrawal limit to $20,000, effective as of January 2026. Expanded K-12 categories are eligible as of July 2025, but they're still subject to the previous $10,000 cap for the remainder of 2025.

Be sure to check the rules for the state operating your 529 program to be sure about new eligible categories for 2025-2026.

Each 529 account has an owner who controls the investments and selects a beneficiary. The beneficiary might be a parent, grandparent, student, close friend of the family or even the owner themselves.

There are two types of 529 plans: One is for educational savings, and the other is a prepaid tuition program. Every state sponsors at least one type of 529 plan, and some private colleges and universities offer prepaid tuition plans. Prepaid tuition plans are still tuition-focused. The new changes to 529s from the OBBB mostly impact savings plans.

The educational savings program is typically the more popular of the two plans. With this arrangement, the account owner chooses the plan and contributes money to it, and then the funds are invested. Investment options are typically preset—usually mutual funds, exchange-traded funds or target date funds based on the child's age. Account owners choose from what's available when signing up, with the ability to periodically change the investment mix.

Over time, the performance of these investments determines the total amount of money in the 529 plan. These investments may go up or down. Consider your risk level and the amount of time left before your child will attend school when deciding how to invest the money.

One way to think about a 529 savings plan is as an investment for education in the same way that a 401(k) plan is for retirement. As with some retirement plans, 529 savings plans can have tax advantages. Some states offer tax deductions for 529 contributions (usually up to a limit); both withdrawals for qualifying expenses and any growth from contributions are also tax-free.

A prepaid tuition plan allows the account owner to buy credits at participating schools for future tuition at current prices. As college education costs show no signs of slowing down, you may save money by prepaying the tuition and fees for your child at today's rates.

There are typically a couple of caveats to be aware of with prepaid plans:

• Fewer options. Most participating schools are public universities, and you only may apply the funds to a specific school, limiting your options.
• Residency requirements. Some states have residency requirements for the account owner and beneficiary.
• Tuition only. While tuition savings can be a benefit, money applied to these plans cannot go toward room and board.
• Higher education only. Unlike the 529 savings plan, these funds can't be used for tuition at elementary or secondary schools.

You also may want to consider what happens if your child doesn't spend their 529 funds. If you've prepaid a tuition plan and your child goes to a different school, the credits you've purchased may not transfer to their preferred college. If your child decides not to go to school, you may transfer the plan to another child or other eligible beneficiary, put it toward your educational expenses or use the funds and pay the penalty on the earnings.

Before deciding to invest in a 529 plan instead of another college savings plan option, it's essential to understand the benefits and drawbacks of the plan. Here's what you need to know before you get started.

• Tax advantages. 529 plans allow for tax-deferred growth, tax-free withdrawals and state-level tax-deductible contributions. However, these may be limited by the rules of the state plan you choose.
• Ownership. As the account owner, you control the funds in the account, and you can set up as many plans as you'd like; there is no limit.
• High balance limits. 529 plans typically include high total balance limits in the accounts. The total balance limit in accounts varies by state but commonly ranges from around $250,000 to $500,000.
• High contribution limits. 529 plans don't have contribution limits. However, according to the IRS contributions to 529s are gifts for tax purposes. In 2025, contributions up to $19,000 per parent qualify for annual gift tax exclusions, and parents can choose to frontload five years of contributions (up to $95,000 per parent in 2025). Some states also may have annual limits.
• Flexibility. 529 plans can pay for various needs, from elementary school to post-graduate expenses (including medical and law school). Plus, there is no age limit for using the funds.
• Roth rollover option. The SECURE Act 2.0 allows limited rollovers of unused 529 funds to the beneficiaries' Roth IRA. Note that a lifetime cap applies, and annual IRA limits/eligibility rules must be met.
• Locking in costs. For prepaid tuition plans, 529s lock in the prices of attending college.

• Plans vary by state. Every state offers at least one 529 plan, but programs can have different fees, contribution limits and restrictions.
• Guarantees. Double-check how and if the funds are guaranteed if you choose a prepaid tuition plan. Some states may change these plans or close them to new investments due to fluctuations in state budgets.
• Limited investment options. Investments may be limited based on which state plan you choose.
• Contributions and student aid. Depending on your plan, contributions may count against student aid. However, a plan owned by a parent typically has a far smaller impact on aid compared with one owned by the student.
• Watch for fees. Some plans may offer investments with higher fees. Before contributing, learn about the expense ratio of the available investments to get an estimate of potential costs.
• Minimum contributions. Some plans require minimum contributions to open the plan and to be made each month afterward. Review the requirements to make sure they fit within your budget.

The IRS sets specific restrictions on how the funds in your 529 plans can be used. You still can withdraw money to use on unqualified expenses; however, these withdrawals are subject to state and federal taxes, and you may have to pay an additional 10% penalty on the earnings.

Qualified expenses include:

• Books and textbooks on course required reading lists; for K-12, curriculum, instructional and online materials are eligible as of July 2025, subject to the annual K-12 cap ($10,000 for 2025, $20,000 starting in 2026 for savings plans distributions).
• Computers and related equipment used by the beneficiary during the years they are enrolled and primarily for educational use.
• Room and board costs; if the student is living off campus, the costs can't exceed the school's estimates for campus room and board.
• Expenses for required fees, books, supplies and equipment for certified apprenticeship programs; plus qualifying post-secondary certificate and certification programs and related or required testing and continuing education.
• Tuition and fees (if utilizing a prepaid tuition plan); for K-12 in savings plans, up to the annual K-12 cap.
• Special needs services, including educational therapies for students with learning disabilities, delivered by licensed professionals (for K-12, these must stay within annual limits).
• A one-time withdrawal of up to $10,000 for student loan repayment.

The IRS offers further guidance on which educational expenses qualify.

If you've decided that a 529 plan is a good fit for you and your family, your next question may be where and how you can open a 529 account. Here are four steps to help guide you:

1. You can invest in any state's 529 plan, but you may want to start exploring your state's offering—you may get particular tax advantages or residency benefits.

2. Look at the fees, investment options and performance (minus the fees). When selecting a plan, many people choose to strike a balance that minimizes fees and maximizes their potential return on investment.

3. Once you've decided on a plan, you can enroll in it directly or by working with an advisor. A financial advisor with experience setting up 529 plans can also help you select an investment plan that fits you and your family's needs.

4. Select the best investment option that meets your risk profile. This may be worth discussing with your financial advisor: Most plans have a few options, ranging from mutual funds to target date plans, which shift the mix of investments from more aggressive to more conservative as your child gets closer to college age.

Most states make it easy to contribute to your plan, offering automatic contributions from your bank account. However, some states have minimum monthly contribution requirements (as well as initial contribution fees), so review these expenses and how they fit into your budget.

You'll also want to consider how much you want to save. That number will depend on your children's age, the college they hope to attend and your budget. A college savings calculator can help you run the numbers.

Before deciding on a 529 plan, take the time to review your options. Consider how the pros and cons align with your family's needs to get a sense of whether it's a good fit. Plans vary by state, and you may find that one state's program works better for you than another—including the one offered by your state.

Connect with a local Thrivent financial advisor to access expertise, tools and resources to help you and your family prepare for the future.