On May 29th, many states celebrate “529 Day” by sponsoring programs designed to encourage participation in college savings plans. Pennsylvania Treasurer, Stacy Garrity, has announced the return of six regional awards, each worth $5,529, to encourage families to save for education through PA 529 College and Career Savings Program Accounts. Click here for the official rules for PA, and click here for details about promotions in other states.
Whether or not taxpayers choose to participate in these contests, all 529 Plans offer prized tax savings opportunities. This post briefly explains the different types of plans and how they work, the potential tax benefits, and other matters to consider related to choosing the right plan.
What is a 529 Plan?
A 529 Plan is a tax-advantaged investment account designed to help families save for qualified education expenses. Funds can be used for college tuition, K–12 tuition (up to $10,000/year), registered apprenticeship programs, and student loan repayments.
The most common type is the College Savings Plan, which offers a variety of investment options. Some states provide pre-designed portfolios, while others allow you to create your own by selecting specific investment profiles.
Anyone who is a family member of the beneficiary can set up a 529 Plan. A beneficiary can have multiple 529 Plans, but total contributions across all plans cannot exceed the aggregate limit set by the state, which can be as high as $621,411. Once this maximum is reached, the plan will continue to accrue earnings, but no additional contributions can be made.
Contributions to a 529 Plan are considered completed gifts for federal tax purposes. In 2025, up to $19,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion. Excess contributions above this amount must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount. A larger, tax-free 529 contribution can be utilized as part of an estate planning strategy if certain requirements are met.
While all states offer a 529 College Savings Plan, only some states offer a 529 Prepaid Tuition Plan. (Click here for info about the PA Guaranteed Savings Plans) A prepaid tuition plan allows all or part of the costs of an in-state public college education to be paid in advance at the current rate by purchasing units or credits. The funds in these accounts can also be converted for use at private and out-of-state colleges.
The Private College 529 Plan is a separate prepaid plan sponsored by more than 250 private colleges. Educational institutions can also offer prepaid tuition plans for their own schools. (Click here or more information about this type of plan)
What Are the Tax Benefits?
Contributions made to a 529 Plan grow tax-free, and taxpayers do not pay ordinary income taxes on those amounts, as long as the funds are spent on qualified education expenses. The contributions cannot be taken as federal tax deductions, but 30+ states (and the District of Columbia) allow state tax credits or deductions. (Click here for a comprehensive list)
Nine states (Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming) have no income tax and, thus, no 529 deduction can be taken in those states. Additionally, four other states (California, Hawaii, Kentucky and North Carolina) do not offer a tax deduction for funds invested in a 529 plan.
Six states (Indiana, Kansas, Minnesota, Oregon, Utah and Vermont) provide tax credits, which can be used to offset the taxpayers’ state income taxes. In general, these credits, offer greater tax savings to a wider range of taxpayers than deductions do. The remaining states (and the District of Columbia) allow taxpayers to deduct their 529 contributions from their taxable income calculation, subject to deduction limitations.
New Mexico, South Carolina and West Virginia, allow taxpayers to deduct 100% of 529 plan contributions from state taxable income. Other states limit the amount of contributions that are eligible for a state income tax benefit. Pennsylvania offers one of the highest deduction limits per beneficiary – residents can claim a $19,000 per beneficiary tax deduction ($38,000 if married filing jointly) for 2025, which is in conjunction with the gift tax limitation for 2025.
Pennsylvania is also one of nine states (Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio and Pennsylvania) that offers tax parity, which means that contributions to any 529 plan (not just the in-state plan) qualify residents for an annual state income tax benefit credit or deduction.
Review this comparison of features and state-related considerations that may impact your choice of where to start a 529 plan.
What Expenses Can Be Paid with the Earnings from the Plan?
If the distributions are taken out of the Plan and used for qualified education expenses, the distributions will be tax-free to the beneficiary. Qualified expenses consist of tuition, room and board, required books and supplies, which include tablets, computers, printers, and educational software. The distributions may also be used to pay interest and principal on qualified education loans that are in repayment, up to $10,000 per individual. For beneficiaries who are attending a college, university, graduate, or vocational school there is no distribution limitation; however, for beneficiaries who are K-12 students in private, public, or religious schools, there is a $10,000 distribution limitation per beneficiary across all accounts.
Final Thoughts
With the added incentives from many states to mark “529 Day,” now is an excellent time to consider your planning options for higher education. If you have questions about 529 plans or other tax planning vehicles, contact a GYF tax professional at 412-338-9300.
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RaeAnna Wargo provided research and writing assistance for this post. As a Senior Tax Associate, she has nearly seven years of experience
