Why Is It Called a “529” Plan?

529 plans are named after Section 529 of the federal tax code. Congress established 529 plans thirty years ago so families would have a simple, tax-smart way to save for their children’s future education. Most U.S. states sponsor at least one type of 529 plan, and most allow ownership regardless of state residency.

In New Mexico, the state sponsors two different 529 plans: a direct-sold plan and an advisor-sold plan. The Education Plan is the direct-sold plan, which means you can open and manage an account on your own, without a requirement of working with a financial advisor. It’s overseen by The Education Trust Board of New Mexico. Think of a 529 as a dedicated savings account with built-in tax benefits.

How Does a 529 Plan Work?

A 529 plan works similar to a retirement account, but for education. The account owner opens an account and names a beneficiary. The beneficiary is often a child or grandchild, though the beneficiary can be the same as the account owner. The account owner retains control of the account: decide how much money to contribute, how the funds are invested, and when to take it out.

When you contribute to a 529, your money is invested in options like mutual funds (a mutual fund is a professionally managed mix of investments that spreads your money across many companies to mitigate risk). Over time, those investments have the potential to grow. The earlier you start, the more time your savings can benefit from compound growth.

Here’s where a 529 really stands apart. In a regular savings account, you typically owe taxes each year on the interest you earn. In a 529, your earnings grow without being taxed, and when you take money out for qualified education expenses, those withdrawals are federal tax-free, too. Over 18 years, that difference can add up to more money for education. As with any investment, the value of a 529 can go up or down, and you could lose money depending on market conditions, but the tax advantages and long-time horizon are what make a 529 a powerful tool for a savings goal that’s years away.

Learn more about putting money in a 529 account and using your 529 savings.

What Are the Tax Benefits of a 529 Plan?

Federal Tax Benefits

With any 529 plan, your earnings grow free from federal taxes, and your withdrawals are federal tax-free when used for qualified education expenses. That means more of your money goes toward education instead of taxes.

New Mexico State Tax Benefits

If you’re a New Mexico taxpayer, The Education Plan offers an extra advantage: contributions to The Education Plan are deductible from New Mexico state taxable income each year. New Mexico is one of only a handful of states in the nation that offers an unlimited state tax deduction for 529 contributions.

Good to know: Grandparents and other family members who are New Mexico taxpayers can claim the state tax deduction too, even on contributions to an account they don’t own.

Explore the full picture on our 529 plan tax benefits page.

What Can You Use a 529 Plan For?

One of the best things about a 529 is its flexibility. It’s not just for four-year colleges anymore! You can use your account for a wide range of qualified education expenses, including:

• Tuition and fees at colleges, universities, trade schools, and vocational programs

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

• Books and supplies

• Computers, software, and internet access K-12 tuition and expenses — up to $20,000 per year, per student

• Apprenticeship program expenses (for programs registered with the U.S. Department of Labor)

• Costs for certain post-secondary credential and certification programs

• Student loan repayment — up to $10,000 (lifetime, per beneficiary)

• Roll unused funds into a Roth IRA for the beneficiary — up to $35,000 (lifetime), subject to rules and limits

See the complete list on our 529 qualified expenses page.

A note on States and Qualified Uses: State law treatment of qualified uses and rollovers may differ from the federal tax treatment. Residents and taxpayers of other states should consider the tax treatments of their jurisdiction.
 

Comparing a 529 Better and a Standard Savings Account

A 529 and a standard savings account both help you save, but they work differently, and each has its purpose. A standard savings account is very low risk and earns a small, steady amount of interest and you typically owe taxes on the interest you earn. That makes a savings account a good fit for money you might need soon.

A 529 plan invests your money, so it carries more risk than a standard savings account — its value can rise and fall with the markets — but it also offers the potential for greater growth over time, plus tax advantages a savings account doesn’t have. For a goal that’s years away, like a child’s future education, that combination of tax-free growth and flexibility is what makes a 529 stand out. The longer your time horizon, the more those advantages have a chance to work in your favor.

The Education Plan offers a range of investment options to match different investment styles. For those not interested in choosing individual investments, age-based or enrollment-year options are available that automatically shifts toward more conservative investments as your child gets closer to needing the money.

Who Can Open a 529 Plan?

Almost anyone can open a 529 plan. Any U.S. citizen or resident who is at least 18 years old and has a valid Social Security number (SSN) or Taxpayer Identification Number (TIN) can open an account with The Education Plan, no matter which state they live in. Most account owners are parents, but grandparents, other relatives, and friends can open an account for a child or contribute to one that already exists. You can even open an account for yourself or your spouse if you’re planning to go back to school.

Grandparents

A 529 is a meaningful way for grandparents to invest in a grandchild’s future.. Recent changes to federal financial aid rules have also made grandparent-owned 529s more attractive: money a grandparent contributes generally no longer counts against a student’s eligibility for need-based aid on the Free Application for Federal Student Aid (FAFSA). Learn more on our grandparents page.

Employers

Employers can offer The Education Plan as a no-cost benefit that helps employees save for their families’ education. It’s simple to set up and easy to administer, and it gives your team a valuable way to plan for the future. Explore the details on our employers page.

Families saving from outside New Mexico

The Education Plan is open to families across the country, such as California and Texas. Families everywhere can benefit from the plan’s flexibility, low costs, and ease of use. Many families choose a plan based on quality, cost, and simplicity, not just home-state tax breaks (if offered).

Can Family and Friends Contribute?

Yes, and it’s easy. With Ugift®, friends and family can contribute to a child’s 529 account for birthdays, holidays, or just because. It’s a meaningful alternative to toys or other gifts that can be outgrown, and every gift helps future education funds grow.

Learn more about 529 gifting.

What Happens If the Money Isn’t Used?

Plans change, and a 529 is built to be flexible. If your beneficiary earns a scholarship, chooses a different path, or doesn’t use all the funds, you have options. For example, you can change the beneficiary to another eligible family member, save the funds for future education (including graduate school), and/or roll up to $35,000 into a Roth IRA for the beneficiary, subject to certain rules. You’re never locked in.

Common Myths About 529 Plans

“529 plans are only for four-year colleges.”

Not true. A 529 can be used for trade and vocational schools, apprenticeships, certain professional credentials and certifications, K-12 expenses including tuition, community college, and graduate school, not just traditional four-year universities. Whatever path a student takes, a 529 can help pay for it.

“If my child gets a scholarship, the money is wasted.”

Also, not true. If your beneficiary earns a scholarship, you have options: change the beneficiary to another family member, use the funds for other qualified expenses, or, in the case of a scholarship, withdraw an amount up to the scholarship without the usual 10% federal penalty (though taxes on earnings may still apply).

“I make too little — or too much — to open a 529.”

There are no income limits on 529 plans, in either direction. You can open an account with no minimum contribution, and there’s no requirement to contribute a certain amount each month. Saving for education is achievable for every family, at every income level.

“The stock market is risky, so my savings aren’t safe.”

It’s true that 529 investments can rise and fall in value. But you choose how your money is invested, including more conservative options, and age-based portfolios automatically grow more cautious as your child nears college age. For a long-term goal, time in the market is one of your biggest advantages.

How Do I Start a 529 Plan?

Getting started is simpler than you might expect. You can open an account with The Education Plan online in just 15 minutes. To open your account, you’ll need:

• Your SSN or TIN

• Your address

• Your beneficiary’s name, birthday, address, and SSN or TIN

Ready to Get Started?

Getting started is a great first step! Contribution options are flexible and accommodate individual saving styles and ability. A little today can go a long way.

Open an account today — it only takes about 15 minutes. Have questions? Call us at 1-877-337-5268, Monday through Friday, 8 a.m. to 7 p.m. MT.

Important disclosures

The Education Plan is neither FDIC insured nor guaranteed and may lose value. When withdrawals are used for purposes other than qualified education expenses, the earnings portion of the withdrawal is subject to federal income taxes and any applicable state income tax, as well as an additional 10% federal tax and the recapture of all previous New Mexico tax deductions taken for contributions to the account. Consider whether your or the beneficiary’s home state offers any state tax or other benefits that are only available for investments in that state’s 529 plan. Consult a financial, tax, or other advisor about your specific situation.