Advertiser Disclosure

Save For Your Child’s Future: 529 Plans Vs. Savings Accounts

Written by Banks Editorial Team

Updated September 18, 2023​

3 min. read​

As a responsible parent, you want to save for your child’s future to realize their dreams. You may be wondering what the differences are between a 529 plan vs. a savings account and other options for education savings. You don’t want to invest in a plan to find a better choice for your financial needs in a couple of years.

Before taking steps to open an account, you need to understand the primary differences between them. Two of the most popular options are a 529 plan and a savings account. Each type of account has its pros and cons. Once you understand the difference, you can make better choices. 

This guide about 529 plans vs. saving accounts makes it easy to compare the 529 plan to savings account to help you weigh your options. 

What Is a 529 Plan

A 529 plan is a savings plan used in the United States to help parents make investments to help offset the cost of their children’s education. This is considered a tax-advantaged plan. Each state runs its own 529 plans, which means the rules in your state might be different from the rules in others.

These plans are typically one of two accounts, a savings account or a prepaid tuition plan. If both are offered in your state, you’ll need to decide which is the better fit for your situation. You might not want to invest in the prepaid tuition plan if you’re unsure your child wants to go to college because a 529 plan can cover other educational expenses. 

What You Can Use A 529 For

In the past, 529 plans could only be used for higher education, such as college and four-year universities. However, those rules have changed. In 2017, the rules changed to allow parents to use the funds for tuition for K-12 schools.

In 2019, the option was added to use the funds for an apprenticeship program. If you want to send your children to a private school, this might be a good option. Also, it offers the flexibility of an apprenticeship program if your child wants to explore that route instead of college. 

The Advantages of 529 Plans

There are advantages to selecting a 529 plan. This is an investment plan, so it can help you earn more than the interest offered by a bank. Here are a few other benefits to consider. 

  1. Tax Benefits: The 529 plan is a tax-advantaged account. This means that the first $2,200 each year isn’t taxed at all. If you spend more than that, you’ll probably need to pay your current tax rate. 
  2. No Limits Based on Income: Some accounts, such as the Coverdell ESAs, are only available to families under a certain income threshold. With the 529, you can open an account no matter how much income your family makes. 
  3. Don’t Have to Wait for a Child: Unlike some other plans, the 529 isn’t a custodial plan. You don’t need to wait until your child is born to open it. If you’d like, you can open the account at the start of a pregnancy or even a few years before you have a child. 

The Disadvantages of 529 Plans

Here are some of the common disadvantages of a 529 plan:

  1. 529 Counts Against Federal Aid: Any funds you have in a 529 are considered family assets. This reflects on your financial aid package. The expectation is that you’ll use the asset in the place of federal aid, and it lowers the amount you’re offered. The effect usually is minimal. 
  2. Penalties for Non-educational Withdrawal: If you use the money in your 529 for something other than your children’s education, you’ll pay the penalty for the privilege. You’ll pay your regular rate of income tax plus a 10% penalty on the funds. 
  3. Penalties for Ill-timed Withdrawal: As a tax-advantaged plan, if you take out more than $2,200 per year per child for educational purposes, you’ll pay your normal tax rate on any funds above that amount. 
  4. Investment Choices Are Limited: Most 529 plans only offered a limited number of mutual funds to invest in. If you want diversity, you won’t find it with this plan. 
  5. Not All 529 Plans Are the Same: Since each state creates its own 529 plan, one might be better than another. Also, if you move to a new state, it might create an issue. 

Savings Account vs. 529 Plans

You might think that a savings account doesn’t offer enough interest; however, compound interest can add up over the years. Also, there is less risk than with a 529 investment plan. 

  1. Choice of Accounts: You can decide how you want to save your money. You can even invest it in bonds and certificates of deposit. 
  2. Tax Benefits: There aren’t any tax benefits for a children’s savings account. If you earn interest, the bank sends you a tax form, and you need to add it to your year tax form. 
  3. Federal Aid: Money in the savings account is counted as an asset, and you won’t receive as much financial aid as you might without it. 

Deciding on a savings plan for your child’s future is important. You need to make sure that you have all the facts before moving forward. This guide about 529 plans vs. saving accounts is your first step in making a decision. 

Advertisement Disclosure

Product name, logo, brands, and other trademarks featured or referred to within are the property of their respective trademark holders. This site may be compensated through third party advertisers. The offers that may appear on’s website are from companies from which may receive compensation. This compensation may influence the selection, appearance, and order of appearance of the offers listed on the website. However, this compensation also facilitates the provision by of certain services to you at no charge. The website does not include all financial services companies or all of their available product and service offerings.