529 Plan
Definition
A tax-advantaged savings plan designed for education expenses. Contributions are made with after-tax dollars but grow tax-free, and withdrawals for qualified education expenses (tuition, books, room and board, K-12 tuition up to $10,000/year) are also tax-free. Many states offer state income tax deductions for contributions. Starting in 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary (up to $35,000 lifetime, subject to annual Roth IRA contribution limits). There are no federal contribution limits, but contributions above $19,000 may trigger gift tax rules.
Example
You contribute $5,000 per year to a 529 plan for your child. After 18 years of tax-free growth, the account holds $150,000. Withdrawals for college tuition and room and board are entirely tax-free.